IIn 1943, future Nobel laureate Hermann Hesse published a novel titled magister ludi (Latin for “master of the game”). Another title of the book, “Glass Bead Game”, remains undecided. It takes place in the future in a place dedicated to the life of the mind. Players playing the game, whose rules are elusive, have to spend years studying disparate subjects such as music, cultural history and math and finding the connections that help them play better. It’s all a bit esoteric, as is monetary policy – which is the point to bring it up now.
Consider that independent commentators had expected, the Monetary Policy Committee of the Reserve Bank of India (RBI) on Thursday announced a quarter percentage point increase in the policy-set interest rate for overnight money. But the committee was surprised and decided – unanimously, please note – to keep the rate unchanged.
Commentators were impressed by the fact that inflation remained consistently above the “upper tolerance limit” of 6 percent mandated under the law. On the other hand, the committee is forward looking and expects inflation to fall to 5-plus per cent in the near future.
Note that the legal mandate is actually an inflation rate of 4 percent, with two percentage points of latitude on either side. The committee does not expect inflation to remain at 4 per cent even a year from now. Yet it has kept its hands off policy-rate hikes, though not because it acknowledges any risk to economic growth. In fact, it has partially raised its growth forecast for the new fiscal to 6.5 per cent. This contradictory sign hasn’t stopped commentators from seeing a magister ludi at work.
If this is what specialization goes for, one might be tempted to say that this particular game is no more sophisticated than Ludo with all its randomness. The sophistication of the players, the experts, lies largely in their invention of logic.
The recent history of central bank behavior around the world should encourage de-mythology, as central bankers are to blame for rampant inflation in countries with traditionally low inflation, and then to control prices. There should be sudden and sharp changes in monetary policy, which has created fragility in the banking system. If it really does pass for expertise, the notorious Brexiteer as well as the lay observer might be tempted to say: “…enough experts”!
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bBut now, as then, it would be emotional excess. India has its own recent history of non-expert policy action, and that history by itself doesn’t say much. The real issue may be that the RBI does not really support the mandate given, and that the government quietly supports such agnosticism in the pre-election year. Hence neither gives the necessary primacy to controlling inflation, nor considers economic growth as a subsidiary objective. This reversal of priorities is the only non-sophisticated explanation for the behavior of the Monetary Policy Committee. Otherwise, the committee would have raised the policy rate on Thursday at the potential cost of slower but still credible growth.
Keep in mind the political-economic context. The growth in per capita income has been barely 2 per cent since the last general election and 3 per cent in the last six months. It is estimated to exceed 5 percent in the new financial year. It’s a question that isn’t easy when signals on economic momentum are still mixed in a slowing world economy, and with high interest rates. Better to ensure that the projected income growth is achieved and forget about 4 per cent inflation for the time being.
As far as the policy mandate is concerned, it is legitimate to ask whether it was wise for the government to set inflation control as the primary goal for the RBI. Opinion is divided. Some ask whether it is really within the RBI’s power to control inflation, given how many factors are beyond its control. But such questions are outside the purview of the Monetary Policy Committee. so what we’ve got is the difference between Legally position in law, and In fact Intentions of policy makers.
By special arrangement with Business Standard