RBI vs FED: How Good Economics Works For Everyone?
One local bank boss says the RBI “runs a repressed financial system which is intolerant towards innovation. If the US was at 90 out of 100 in terms of complexity and sophistication, we are at 10…I sometimes get the impression it [the RBI] is resting on its laurels, not realising that more financial innovation could help India’s development.” – The Economist
The capitalist, industrialist, imperialist aren’t the happy men here. There is nothing more fancy policy in nature if it fails to keep the price of daily bread constant. The capitalism crises have made this happen, bread prices fluctuate much more than the smart phones. While Bernanke and Obama still fumble for a perfect fiscal and monetary relationship, Subbarao and Manmohan have made it certain; India and its willingness to deal with the present crisis. RBI’s no rate change policy states the common man concern of rising prices a priority over industrial expansion in the countryside. RBI has successfully maintained the inflation and balanced growth relationship while simultaneously regulating the Indian banking industry.
Comparing RBI’s perspective with FED, there is nothing much in common about them. Although they are both operating in an environment where fiscal policies aren’t doing much to accelerate growth and tame inflation their approaches have been much different. While FED believes in buying billion dollar US treasuries such that interest rates go down encouraging consumers to spend, RBI tries to defuse the cash tripped Indian market primarily responsible for unregulated money supply hence the inflation.
Obama’s policies have made it clear; financial buyers are not willing to buy his treasuries necessary to finance the spending; only the central bank comes to rescue projecting more job growth in the US economy. The primary assumption lies in the central bank reforms that some magic always heals the economy. However, this massive easing depreciates the dollar, creating an export chaos with more dollars chasing few Chinese or Indian goods. Further it attacks the common public with a rise in prices of the daily produce leading to another crash in the market. Dollar has now joined Japanese Yen as a cheap funding currency. The simple Keynesian led US growth story is accompanied with high degree of leakages, majorly inflation and export-led growth. While no confidence in dollar provokes people to buy real goods hence increasing their prices. The Europe economic slowdown hurts the US sentiments unfortunately as they can’t find their customers on Mars, Nobel Prize winner Paul Krugman famously said.
The Reserve Bank of India has entirely different dimensions. Not fortunate to be a developed nation state, the cash stripped market happens to be the biggest worry. The cyclical markets like manufacturing, industries and their negative outlook create a crawling growth rate of just around 5%. To bring more chaos the fiscal deficits have been rising with no reform process initiation that could possibly take place. However, RBI had a different economics to perform. Instead of heavy rate cuts they moved ahead for soaking excess liquidity and some fiscal reform initiation, it resulted in job cuts, rupee depreciation and soaring crude oil prices. However, after much of tussle between fiscal and monetarist, the reforms stated initiating. The fiscal consolidation plan restricting 6 cylinders and diesels hike along with FDI reforms help the nation economic building. The RBI’s much delayed decision of a rate cut has blocked the industries for a while but certainly helped its civilians from hyper inflationary pressures. The ideological rift behind Indian monetarist was based much more on improving the fundamentals rather than some short term revivals.
While Bernanke is still in the pursuit of reviving the economy, RBI kept the inflation rates below double digit while simultaneously maintaining a balanced growth rate with a revival in Indian economy much more certain. The common man’s monetarist approach happens to be much more productive than industrialised reforms.