Do we really need a Central Bank in India?

This is a question that requires deeper thought. My friend Amol Agrawal (see the earlier blog wherein we are debating monetary policy issues; you can also see his blog has compared the working of the banking market to the stock market. The SEBI is a market regulator in the stock market. While the SEBI regulates, it does not really set the prices of the stocks.

Can’t we have a similar model in the Central Banking space?  So why can’t the RBI be just a regulator? Why does it have to control the interest rate regime in India?

Here are some views.

Indian interest rates are not controlled by the RBI

Well, firstly, in India, we do NOT have an administered interest rate regime. We haven’t had that for years now. So, the RBI does not act as a super controller of the interest rates but yes, to say that it does not give guidance on the expected movement of interest rates would be childish.

In fact, even today, when the review happened, one of the issues mentioned by the RBI Governor is that a reduction in repo is NOT translating into a reduction in the lending rates by banks. The lending rates of major banks were reduced after the repo was cut in three consecutive sessions by the RBI. Macroeconomists calls this to be the failure of the Monetary Transmission Mechanism and the RBI has kept on saying that this inelastic MTM does not allow it to influence business environment to the extent that one expects it to.

Call it failure of the MTM or whatever, but the fact remains that interest rates offered by banks do dance to the tune of their own analysis of the business environment though they do tend to have a correlation to the repo or other policy rates set by the RBI.

Thus, my first point is that we do not have a model in India where banks are totally controlled by the RBI into offering interest rates that they do not find appetizing.

Banking deposits are HUGE compared to savings in stock format

Second, can we really draw parallels between the stock market and the banking sector? I curiously went back to the Handbook of Indian Economy in order to see how the household financial savings are split between banking deposits and stock investments.

As per the 2014 data, Indian households hold 57.3% of their financial savings in the format of bank deposits whereas they only hold 4.2% of their savings in the format of shares and debentures combined. Further, 145 million out of our 245 million households have access to/ actually hold a bank account (Pre-Jan Dhan figures). That is, nearly 55% of Indian households have a bank account. Compare this to less than 1.5% of Indian households that take exposure to stocks.

It is obvious that interest rates as a “price” has a far far greater impact on the savings behaviour of Indian households as compared to stock prices.

Thus, my second point is that from a savings dominated growth perspective, its fairly important to have a mechanism that can offer a correction in the banking sector as compared to the stock market sector.

Banks affect real sector growth

The third point that I’d like to make here is that the most delicate link between the real sector and the money sector for any economy, is banks. Banks charge a lending rate that can fire up or dampen down investments. Banks also offer a deposit rate that can help channelize the savings of gold crazy and real estate crazy households towards financial savings. For a developing economy like India, a totally independent banking sector could cause extreme volatility in either savings or investment patterns, rendering our growth path more volatile.

Look at the track record!

The fourth and last point I offer is, if it ain’t broke, don’t fix it. I wouldn’t be too sure that Central Bankers are Central Planners “creating havoc with the system.” The RBI track record has been one with impeccable inflation numbers and a banking sector, which is hugely over-regulated, but has never once collapsed either!

However, I do hereby humbly submit that, to a person like me with free market leanings, the idea of a free banking sector is also very appealing. I am not saying this is a bad idea, I am saying it is a bad time in which to implement this idea.

As Mirza Ghalib would have suggested, “Dil ke khush rakhne ko, Ghalib, ye khayaal acchhaa hain!”








Dear Reader,

This article appeared in the Hindu Business Line under my column titled “Tweakonomics.” You can see the article directly at Enjoy!


Sigh! This International Yoga Day is really getting to the economists. The closer it gets, the more hassled they look.

And now that it’s here, even as the world celebrates the uplifting art and science of the body and the mind, the economists will be seen frozen in a corner, with numb bodies and dumb minds. Why, you may ask. Why, you may wonder. Why, you may well say with that snooty indifference which only muggle non-economists can have.

It’s simple. Our hopes stand crashed. We were told that Yoga is the most generic solution to any problem, personal or interpersonal. But we have been conned. And we are now sore as hell. Because it looks like Yoga does offer solutions to all types of issues, so long as they are not of the economic type. The UN Secretary General Mr. Ban Ki-Moon (BaMo) says that the singular act of getting the tree posture (Tadasana) right gave him that “simple sense of satisfaction” of having set the world right. Just try getting that GDP series into the tree posture.

So, imagine, how Baba Ramdev would react on seeing the GDP growth series. OMG! That would be like seeing a seriously distressed patient, with pathetic levels of energy. “Anulom Vilom!” The commanding voice will bark and while all 3500 participants at the Nehru Stadium will demonstrate the sharp intake of the breath, the GDP series will give out a huge sigh and continue on its way out of the stadium, looking more depressed than usual.

Send in the WPI. Hell lot of negativity all over. The Ramdev solution? Immediate pranayam to get the positive vibes back into the series. The entire RBI is now breathless doing Pranayam for the past 6 months, but WPI hain ke manta nahi. Perhaps the right thing is to get the Arabs into Pranayam mode, so that they’ll not swamp the markets with crude.

And just look at the exchange rate series. Like a temperamental artist, it goes all over. It’s so volatile, surely Yoga can help us to calm down this hyper energetic model? “Padmasana!” says the Master. The Lotus will help to stabilize the exchange rate. Really, now. Ahm, that’s too politically correct, isn’t it? No, let the exchange rates dance their zumba.

Baba will have to really think when he sees the interest rate though. Firstly, there’s a schizophrenia issue. Sometimes, the series is a repo, at times it can convert itself into lending rates, and sometimes it dons on an international personality like the LIBOR. “Shavasana!” The posture of the dead body. The classic remedy to calm down mental issues. But surely, we can’t afford a lifeless interest rate, can we? They have been in a dead state in Japan for nearly 15 years now and still the gloom persists.

Further, this is a series that is not in great form physically either; it’s seen too many surgeries for its own good. It is sometimes raised to a great height and pegged to a target and then slashed. Hmm, post-surgical Yoga. Tricky, this one. But no problem. We have a solution, says the Master. “Ardha Titaliasana!” The butterfly posture. But that is recipe for chaos theory. Fluttering of a butterfly in Indian banks causing a storm in businesses, you see. Thanks, no thanks!

Bring in those tricky blighters. The fiscal deficit and public debt. The sweetmeats you consume everyday and the total added up weight of the body. The diagnosis is immediate. Obesity. “Shirshasana!” The headstand. And view everything upside down, eh? And then you’ll claim that economists are freaks and need Yoga to calm down.



My Choice, says the RBI!

My repo, my CRR, my choice. Not to offer a rate cut, even if the corporate spirit roams unrevived.

My choice, to be size 7.5% or a size 4%. They don’t have an optimum interest rate size, and they never will. To use CRR or the repo to trap inflation is to believe that you can halt the expansion of monsoon induced prices. Or capture growth in the palm of your hand.

Growth is caged, let it free. Interest rate is not; let it be. My choice. To cut or not to cut. To have a rate cut before policy review, out of review or not to review at all. My choice.

To cut temporarily, or to cut forever. My choice.

To use the CRR or the repo, or both. Remember, the cut is my choice. I am not your privilege. The PDMA to be created, the Monetary Policy Review Committe to be set up, adding your inflation target to mine, they’re all ideas and can be replaced- My commitment for inflation control cannot, so treasure that.

My choice; to declare a review every month. Don’t be upset if I don’t do a review every month. Don’t be fooled if I give a review every week.

My choice, to support growth or not. To pick it up from 2 trillion dollars or not. So don’t get sassy. My inflation control might be your pain; my steadfast rates, your bane. My order, your anarchy. Your sins, my controls.

My choices are like my fingerprints. They make me unique.

I am the central bank of this country. I am the emerging market, not the globe. You are the emerging market. Wake up. Get out of the stagflation storm. I choose to empathise. Never indifferent. I choose to be different. I am the currency. Infinite in every direction. This is my choice.