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ShareThe Reserve Bank of India (RBI), by resisting calls from eminent economists, politicians, market participants and topnotch global investors, protected the Indian financial system from going the way of its more developed counterparts across the globe when the financial crisis hit the world economy last year.
The "great thinkers" wanted RBI to ease access to foreign investors to the Indian markets as well as Indian borrowers/ issuers to the global market.
They also wanted it to go easy on lending norms of the banking system as well as free the financial system of high reserve requirements.
They were critical of the RBI's adoption of counter cyclical monetary policy as well as their currency management policies. They wanted easing of norms on derivatives to enable higher leverage.
In short, they saw the global central banks as highly developed in their policy frameworks and the wanted RBI to follow others rather than work out its own course.
The fact that the Indian financial system withstood one of the toughest environments for financial markets and came out in flying colours is a testimony of RBI's careful ways.
Not that Mint Road was always right in what it did, but by erring on the side of caution the RBI was able to bring the financial system on an even keel without resorting to any drastic measures including bailouts of large institutions. It did what it felt was best for the Indian economy and that paid off well.
The current situation is turning out to be somewhat similar to the one mentioned above.
The consensus opinion of these "great thinkers" is that the RBI should not remove accommodative policy in their review meeting on the October 27. They believe that the "time is not right" and any withdrawal of policy accommodation will threaten growth. The RBI, however, will follow its own agenda i.e., doing what is best for the Indian economy.
The policy review comes almost exactly one year after the RBI started adopting an aggressive accommodative stance.
Growth was under threat, inflation expectations were falling rapidly from falling commodity prices, industrial output was shrinking, exports were shrinking, liquidity was draining on the back of portfolio outflows, currency was depreciating and global recession was gaining hold.
The situation is now completely reversed with growth no longer a large threat, inflation expectations are rising rapidly from rising commodity prices, industrial output is expanding, exports still shrinking but at a slower rate, liquidity increasing with portfolio inflows, currency is appreciating and global economies looking to recover sooner than later.
The RBI in the current situation has been sounding hawkish on withdrawing policy accommodation and is more likely to follow their own agenda than what others expects then to do. Do not be surprised if RBI starts reversing accommodation as early as next week.
Disclaimer: The author is head, fixed income, IDFC Mutual Fund. Views arepersonal.
