As these columns have already argued, tomorrow?s monetary policy announcement should be centered around a cut in RBI?s policy rates. The logic for this is solid: looking forward, aggregate demand looks vulnerable, with investment and exports both far from recovery; inflation is not a threat, seasonally adjusted price data, even for consumer prices, shows that clearly; real interest rates are high. The best call now would be a rate cut, because it can do some good and do no harm. RBI doesn?t need to start thinking of a tight monetary policy now. As these columns have also observed, the smart money is on RBI keeping things as it is. That will be a missed opportunity, if it happens. But even in a status quo monetary policy, what RBI says, and how it says it, is important. Governor Subbarao had once said among his priorities will be demystifying the office of the governor and making RBI communicate better at both technical and non-technical levels. These are excellent objectives because RBI is not the greatest policy communicator in the world. Apart from the turgidity of language that it shares with all government institutions, RBI also frequently doesn?t clearly list and answer the most important questions.
As many analysts have noted, this time the important questions, even in a status quo monetary policy, concern the central bank?s near future approach to liquidity, managing government debt and food prices. We have a set of arguments on how RBI should and shouldn?t approach each of these variables. There are other views. But everyone must clearly know what RBI?s views are. Know in the sense, to recall Governor Subbarao?s promise, that it is demystified and it demonstrates better communication. Central banks elsewhere communicate much better, and many of them can?t afford mystification. The US Fed is a good example. Ben Bernanke, who unlike his Indian counterpart has to defend his policies in front of legislative panels, wrote a newspaper article explaining his views on the ideal time for a reversal in monetary expansion. How wonderful it would be if our central bank governors felt as compelled to explain themselves, or if there were institutional arrangements for gaining a better understanding of how RBI decides on crucial monetary questions. Even former Fed chiefs don?t escape scrutiny. Alan Greenspan, once considered god, was summoned by US legislators who wanted to see if his feet were of clay. Greenspan had a hard time. The principle of periodic institutionalised scrutiny of course applies to all regulators, not just RBI. But its absence seems most glaring in RBI?s case because no other regulator is as big and as powerful. One can agree or disagree with RBI. But no one can disagree that we will all be better off if RBI appears less mysterious.
