In Wikileak times, top RBI official turns loose cannon

Central bank mandarins are almost always taciturn, mostly withdrawn, reticent, and at worse, measured with what they speak, as any unintentional slippage can wreak havoc in the financial markets.

So, when a top-level Reserve Bank of India (RBI) official poured his heart out on Mint Street’s policy stance in front of a motley group of reporters, a wave of shock, anger and awe ran through the markets.

Some were stumped by the untamed hawkishness and several others were left wondering about the palatability and sanctity of the central banking communication process, especially because this official rubbished the stand his boss had taken in a quarterly monetary policy review just two days ago.

“How can this official say all this... have they all gone mad?,” asked a bond trader, perhaps the most gentle of the dealers, who called up to check the circumstances under which the outbursts from the senior central banking functionary came.

“Is there a mutiny of some sorts or what? This is not good for the markets,” the chief trader at a foreign bank said.

“We have been getting calls from our overseas counterparts... But what do we say? We are as stumped as they are. This is not good...  We’re telling them we are still sticking to the written document (policy statement),” he said.

In what could be termed an inexplicable move, a top-level official of the RBI launched a no-holds barred attack on the monetary policy stance, making a strong case for much more aggressive rate hikes.

The RBI official bet that the current level of rates were woefully low if the central bank was serious about pulling down inflation from its current level — from over the 10% mark.   

“The basic question is—for the last one year, inflation is (around) 10% and repo rate (around) 5%. With RBI injecting liquidity at 5% and inflation being at 10%, they will never be able to control inflation everything else remaining the same,” the official remarked.

The 10-year bond fell by about 35 paise to Rs 100.05, though it partially recovered later in the session.

If some RBI watchers felt the policy review was somewhat lacking in aggression, today’s explosive comments from the official have left them dumbfounded.

“Looks like these guys have just woken up on inflation. Anybody who knows bit of Excel could have said inflation is going to be a pain,” said a senior bond trader at a European Bank.

“Anyway, the governor himself was quite hawkish with his comments on liquidity in the press conference (Tuesday). This guy, whoever you say he is... is even more. These guys should have said this and done that in April itself, then we wouldn’t have had this kind of pain.”

“Its now a cut-loss for the RBI as well as the government.”
The debate now is about who is this central banking official’s targeting?

Was the vitriol, just two days after the policy, aimed at the RBI itself or at the ministry of finance? Geographically, he was nearer North Block.

There have been some murmurs that the RBI indeed wanted a tougher rate action, but was shown the red flag as the government feared that a stronger dose of rate hikes could hurt growth prospects and make a rather arduous borrowing plan costlier and more difficult.

So, while the policy document and on-record comments by RBI officials were very much in sync with the policy stance, today’s off-the-record barbs could be meant to set the record straight.

If it was a game plan, it makes the matter even worse for the central bank from a credibility and communications perspective.

“It could be difficult to believe RBI officials could consciously choose to adopt this method if they have to get back to (at) the government. But you never know the way things are going between the RBI and the government,” said a bond dealer with public sector bank.

“The leaked letter of the Governor to the finance minister on the ULIP is a case in point. Who would have leaked it? RBI or the government?”

Interestingly, a research paper by US’ National Bureau of Economic Research has found that when it comes to Federal Reserve, watching what officials say is as much or may be even more important than watching what they do.

The case is no different when it comes to RBI officials’ open mouth operations, which at least have a telling impact on the market sentiment.

Whether he has been reading Wikileaks and whatever may have triggered or motivated this top-level official to flare up, it has surely dented the RBI’s image of being one of the most venerable institutions of the country.

The market could be still wondering what hit it today.
The RBI too could be thinking the same.