Inflation is not a bomb that was lobbed on 1.13 billion Indians late evening on 24 June. Neither is it a rogue plane that ripped through the Reserve Bank of India (RBI) headquarters on Mint Road in Mumbai on that day. Then why did the Indian central bank have to announce its policy measures past 8pm last Tuesday? There was no surprise in RBI governor Yaga Venugopal Reddy’s decision to raise the policy rate as well banks’ cash reserve to rein in inflation, but what baffles me is the timing of the announcement.
In the recent past, only once—on 22 January—did the Federal Open Market Committee, or FOMC, the policymaking body of the US Federal Reserve, announce its decision to lower policy rate before market hours. But that was an out-of-turn announcement and not an outcome of a scheduled FOMC meeting.
Traditionally, central banks announce policy measures during market hours when such measures are taken at their review meetings. And RBI is no exception. It announces its annual monetary policy in April and the mid-year review in October. Then, there are quarterly reviews in July and January. On all four occasions, the policy measures are made public during market hours. But when RBI takes measures outside its policy meetings, it prefers to make the announcements after market hours. Indeed, such sensitive policy decisions should not be announced during market hours, but why should the regulator take so long, particularly when the decision is not a reaction to a sudden development? The equity market in India closes at 3.30pm; foreign exchange market at 5pm; and the bond market at 5.30pm, unless RBI extends trading hours on special occasions.
Till recently, Fridays have been the favourite day for RBI to make such inter-meeting announcements. There are historical reasons behind this. Commercial banks in India are required to furnish data on growth in credit, deposits, investments, etc., on alternate Fridays, called reporting Fridays. Friday is the ideal day as the global financial markets take Saturdays and Sundays off.
On 11 June, when RBI made its first out-of-turn decision to raise rates to fight inflation, the announcement was made after 7pm. Last week, it was made well past 8pm. But inflation has been rising since January. From 4.26% in the first week of January, it rose to 8.23% in mid-March, 8.75% in end-May and 11.05% in the first week of June. RBI, whose mandate is to oversee price stability and ensure availability of credit for productive purposes, should not have been caught off guard. But it seems that RBI did not anticipate the rise of inflation to a 13-year high. Otherwise, how does one explain its decision to hike the policy rate by a quarter percentage point on 11 June and follow it up with another half-a-percentage point rate hike, accompanied by a raise in CRR, on 24 June? Had it been aware of the trajectory of the rise in inflation rate, it would have certainly gone for tougher measures on 11 June itself and not waited for another dose of action in less than a fortnight.
After the inflation data was made public on 20 June, Reddy flew to New Delhi to meet Prime Minister Manmohan Singh and finance minister P. Chidambaram to discuss possible monetary actions. People at the central bank say executives of the monetary policy department of RBI, which is headed by deputy governor Rakesh Mohan, worked to 22 June, a Sunday, to take a close look at the macroeconomic developments and the very next day, on the sidelines of a function at the National Institute of Bank Management in Pune, Reddy made it obvious that another round of rate hike was imminent when he said, “We are currently in the midst of intensive examination of issues and options.”
He rushed back to Mumbai on the same day and held a meeting of the technical advisory committee on monetary policy to review the situation. Normally, this committee, which has members such as S.S. Tarapore, a former deputy governor; Shankar Acharya, professor, Indian Council for Research on International Economic Relations; Suman Bery, director general, National Council of Applied Economic Research; R.H. Patil, chairman, Clearing Corp. of India Ltd; and D.M. Nachane, professor, Indira Gandhi Institute for Development and Research, meets ahead of RBI’s monetary policy announcements every quarter. This was its first out-of-turn meeting and it went till 9.30pm. Acharya, who could not come to Mumbai, joined the meeting from New Delhi through video conferencing and, if my sources are right, the members were sharply divided on the quantum of rate hike.
But there is nothing unnatural about it and it does not explain why RBI had to wait till 8pm the next day to announce its policy measures. Is it because of the length of the statement that accompanied it? I’m sure that every sentence of the 1,350-word statement was weighed again and again before being put up on RBI’s website. But then, do we need such a long statement? After all, the previous day, Reddy had made a detailed 950-word statement on inflation and the state of affairs in the Indian economy. None of the FOMC statements contains more than 200 words.
The other reason could be that RBI had to wait till the finance ministry and Prime Minister’s Office vetted the statement. But I refuse to believe that.
Tamal Bandyopadhyay keeps a close eye on all things banking from his perch as the Mumbai bureau chief of Mint. Please email comments to firstname.lastname@example.org