19. February 2019, 11:35 Uhr
Though it didn’t come wholly unanticipated, the rate cut by the Reserve Bank of India (RBI) on 7 February raised a few eyebrows nonetheless (our own included). Of course, inflation was abating all over 2018 and has continued its subdued development into the new year: indeed, at some 2 per cent it is at a level scarcely akin to an emerging economy. Yet it remains the disconcerting feeling that the primary driver behind the turnaround in the RBI’s policy stance, which also changed its guidance from “appropriately tight” to “neutral”, is politics.
Ever since the Modi government drove Raghuram Rajan, a professed monetary hawk and inflation foe, from his post as the RBI’s governor in late 2016, the board of the central bank has been coming under increasing political pressure to facilitate the government’s economically expansive (as much as expensive) policies. Long haunted by an all but useless bankruptcy code rendering huge parts of Indian banks’ loan books lost and hollow, the country’s banking market is marred by an out-of-control shadow lending sector into the addition (see related post). For a time, and particularly so under the remorseless Mr Rajan, the RBI strong-armed banks into equity raisings and mergers to protect them from collapsing, and even forced some of them into closure when a new bankruptcy code made insolvencies less opaque. Those times of independent monetary sanitizing are gone for quite some time. Only last year, the government forced the RBI to accept an expressed advocate of an ultra-expansionary monetary policy on its board, Swaminathan Gurumurthy. Mr Gurumurthy has also stated his criticism of an all-too independent central bank time and again, calling for the RBI to be more answerable to the government’s economic policy intentions.
Over that spat, the RBI then lost its next governor, Urjit Patel who had tried to defend the RBI’s independence tooth and nail. Hence, many observers cannot help but feel that in a general election year, the central bank’s recent evolution of its policy stance might owe more to political influence than macroeconomic reasoning. If that impression becomes entrenched, an already pressurised Rupee stands to get under even greater pressure, thus exposing India’s Achilles heel of old: imported inflation from its gargantuan oil imports bill paid in US-Dollars.