A young man, dressed in formals, stepped out of the Reserve Bank headquarters in Mumbai on a hot April afternoon, a little bemused. As he waited for his car, he recalled the conversation that took place minutes ago. As an economist and a number-cruncher, he was prepared to speak his mind, though tempered by a language one uses while chatting with the RBI governor. But there was something that Governor Duvvuri Subbarao was strangely insistent to find out from him and other economists, who had assembled. It was one of the customary prepolicy meetings where the governor tries to figure out what the world outside beyond Mint Street is thinking. "He kept on asking something basic, theoretical, almost text bookish...Today, when I when think back, I understand why," he said after Friday's rate hike. The guv's question that reminded him of his undergrad days: 'Which of the two views would you subscribe to - first, if you want to tackle inflation, there is no other way but to sacrifice growth; second, if you want higher growth, learn to accept higher inflation, and after some time growth will take care of inflation.' They aren't exactly the two sides of the same coin. For central bankers and economists, they are two divergent paths - almost like Frost's two roads that "diverged in a yellow wood" and sorry, you can't travel both. At the meeting, Subbarao was simply fishing for a reconfirmation from 'outsiders' before he and his men took the first road. The visitors, like the central banker, felt that second road was far too dangerous. None of them thought it was time to think out of the box - something that Kaushik Basu, the government's chief economic adviser and a darling of the electronic media, wants them to. The LSE-trained Basu's bespectacled face, carrying a hint of a smile, frequently appeared on business channels last week; he wasted no breath in advocating that RBI should pause. Well, RBI didn't, sparking a train of angry sound bytes from corporates, many of them who are snooping around for cheaper money to refinance loans. Basu said he has reservations about Friday's rate hike.
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Finance minister Pranab Mukherjee, who Basu reports to, appears less bothered. The seasoned politician, who has to divide his time between presiding over multiple committees and tackling sudden surprises like Anna Hazare, comes across as someone who's comparatively less concerned by RBI's actions than a few of his predecessors. At least, till now. But that can change with a few more rate hikes and the sound bytes can become shriller in the months to come. Subbarao, the bureaucrat-turned-RBI governor could turn less 'consultative' as he approaches the end of his new term, and a desperate government may run out of patience as it battles a newly revived Opposition and nears a crucial election. There are recent moves, albeit at a more subtle level, that indicate New Delhi and Mint Road are working at cross-purposes. Fully aware that a hawkish RBI will do whatever it takes to make money more expensive, the government loosened the rules on foreign loans for corporates. You don't pave the way for easy money when the central bank is trying to turn off the tap. There may be more such instances when the government has to give in to corporate pressures as growth slows down. Corporates have a singular point: 12 rate hikes, with a few of them unexpectedly aggressive ones, have failed to bring down inflation; so RBI has failed, and doggedly pursuing rate hikes will kill growth. Companies that are panicking the most are the ones whose loans are coming up for repayment. For RBI, it's risky as well as a far too simplistic a line to toe. Central bankers, typically, are like freemasons: they talk little, and whenever they do, it's in a language that few understand outside their circle. Subbarao has been trying to change that.
ET In simple, clear English, he spells out why RBI has taken a measure, and even made power point presentations - the first RBI Guv to do so - to drive home his point to industry bodies. He used the same language to say that the government has done little to control inflation and even hinted that the growth and production data churned out by government agencies are dubious.
