Reserve Bank should reschedule its monetary policy reviews

Reserve Bank should reschedule its monetary policy reviews

The Reserve Bank of India’s (RBI) second quarter review of monetary policy will be unveiled on 2 November. On 2-3 November, the federal open market committee (FOMC) of the US Federal Reserve board will meet and very likely announce the second round of quantitative easing.

This asset purchase programme, which is expected to be of the order of half a trillion US dollars or thereabouts, will unleash a wave of liquidity. Asset markets have already moved up in anticipation of this event, capital flows to emerging markets have surged and their currencies have appreciated against the US dollar.

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Surely this event is of utmost significance for policymakers such as RBI in emerging markets like India?

A Global Financial Stability Report of the International Monetary Fund had pointed out that global liquidity, by which they meant money supply growth in the G-4 economies of Japan, the US, the euro zone and the UK, has an impact five times as large as domestic liquidity on what it called the liquidity receiving economies, or the emerging markets.

The point is that monetary policy in the US matters immensely for emerging economies. Does it not, therefore, make sense to have the RBI’s monetary policy statements a couple of days after the FOMC meetings, after taking the US monetary policy stance into account?

This matters all the more in these uncertain times.

Unfortunately, though, the RBI monetary policy review dates are invariably before the FOMC meetings. For example, RBI’s annual policy statement for 2010-11 was on 20 April, while the FOMC meeting was on 27 and 28 April. The first quarter review of monetary policy was on 27 July, again a few days before the 10 August FOMC meeting and the mid-quarter review was on 16 September, just before the FOMC meeting on 21 September.

It’s almost as if RBI wants to keep its meeting a few days before the FOMC meeting by design. The schedule for FOMC meetings are available till the end of 2011 and all RBI has to do is schedule its meetings a few days later.

But perhaps RBI is deliberately making a political statement about its independence? Or could it be the Indian central bank’s way of telling us it is ahead of the curve?

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