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Tuesday, June 19, 2012

“Thus far and no further…” – says Subbarao in the RBI Mid term policy


After the unexpected 50 bps cut in the last meeting, the Finance Minister and various other political babus were almost hunkering on the RBI to cut the rates further and kick start growth.

The RBI, on the other hand was in no mood to oblige, and play cover up for the fallacies of the government. Hence it did not cut interest rates in its Midterm policy review.

More so, the document clearly stated that the growth slowdown had more to do with the policy paralysis and the fiscal mismanagement and profligacy than the interest rates. I believe this is the bluntest rejoinder that the RBI can give to the government to first clean up its mess and get its act together before expecting RBI to go easy on loosening the economy rates.

Whatever be the policy response, if any, though the markets may have taken it negatively yesterday. However, I believe that sooner or later the investors should come back because of the following reasons:
  1. By its actions, the RBI has again demonstrated that it is one of the most credible, independent and astute central bankers in the world,
  2. While even the likes of Federal Reserve, who are bent on destroying their currency and economy by indiscriminate money printing, QEs and diluting quality of Federal assets, for momentary and unsustainable pickup in economic demand, the RBI’s pragmatism should be like a breath of fresh air
  3. By refusing to bow down to the government’s diktats, the RBI has also reposed faith that at least some institutions are working as they should be, towards the long term benefit of the country and not play to the gallery by ineffective quick-fix remedies
The stock markets ultimately reflect the health of the economy.

RBI’s refusal to go in for quick-fix remedies and its stress on structural reform will go in a long way in boosting the health of the economy which will lead to much sustainable growth in capital markets.

The media should play a positive role in explaining to the country, why RBI is right in being tough and on whose doorstep lies the blame for the current economic slowdown, rating downgrades etc.

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