The Outlier Indian

Adjusting for inflation, the real Indian economy is shrinking. Yet, the asset prices are going through the roof. The masses are suffering from faltering livelihoods, stagnated wages and uncertain future with elevated inflation to add to their misery. Yet, the share market is at a record high. How has India achieved this rare distinction of contrasting economic halves to co-exist? The credit goes to Shaktikanta Das and the RBI.

Every Central Government has always wanted access to cheap money and favourable monetary policy regime irrespective of its impact on the economy. It has always been up to the RBI to maintain a modicum of respectability and judicious measures to balance the divergent demands. With Shaktikanta Das at the helm, RBI has become the most subservient institution acting against its stated objectives.

RBI’s MPC has a single objective of keeping inflation with-in 2-6% band. It has failed miserably. RBI is responsible for a policy regime conducive to economic growth. There is no economic growth to talk about. RBI is responsible for the stability of the economic system. Three banks, PMC, Yes Bank and LVB have failed. Some pro-active regulatory fore-sight RBI has.

How do Shaktikanta Das and RBI manage to screw up every objective and yet be a blue-eyed boy of the Government?

Operation Twist

RBI is not allowed to directly finance the Government. There is a reason why RBI is barred from this dreaded step. Deficit financing assures the Government an uninterrupted on-demand supply of free money with no incentive to change its extravagant behaviour. It leads to runaway inflation with Government continuing its wasteful expenditure.

And, this is precisely what Shaktikanta Das has done under a fancy name of Operation Twist. RBI cannot directly buy government bonds. So, it is swapping the bonds, short-term with long-term, in open market operations. How is this different from deficit financing or in simple terms, printing more and more currency?

RBI is issuing bonds on behalf of the Government, which it cannot subscribe to. So, it is buying the very same bonds under the garb of swap in the secondary market. This is increasing the money supply, increasing inflationary pressures and concealing the economic frailty of the country.

Unless for Operation Twist, the bond yields would have sky-rocketed, bond prices crashed, bond buyers would have been scarce demanding a premium. This would be expensive borrowings for the Government of India and also a kick in the gut.

Courtesy Shaktikanta Das and RBI, the Government is saved the blushes and also gets access to cheap money.

Interest Rate Reduction

Monetary policy is an important tool but it is not the only tool for stimulating economic growth. RBI under Shaktikanta Das has a single-minded focus on interest rate reduction as a solitary weapon to boost the Indian economy.

As soon as inflation hovers around the 4% mark, the MPC piously announces that it is duty-bound by its sole objective of inflation control and has no other choice but to reduce the interest rates. However, when the inflation breaches the 6% mark, the MPC will say that it is transient; there are temporary supply-side constraints/bottle-necks and it will wait and watch with no action warranted.

This, not accommodative, but blatantly one-sided tactic has ensured the permanency of the low-interest regime with no positive rub on the Indian economy. Why hurry to take a loan? The industry and individuals keep waiting for the RBI to reduce interest rate every two months. There is no real benefit to the economy of interest rate drops.

Yes, It has removed pressure and obligation whatsoever on the Government for substantial economic reforms. RBI’s actions convey to the Government that it need not bother about the ailing land and labour market, antiquated laws and regulations, the executive lethargy and slack.

Courtesy Shaktikanta Das and RBI, the Government is saved any work to give impetus to the economy.

Kick the can down the road

Shaktikanta Das conducts press conferences with impunity ala politicians. He announces COVID-19 EMI moratoriums devoid of details and logic. He further announces that no statutory defaults can happen till next year whether EMIs are paid or not.

Shaktikanta Das sorts out the Yes Bank mess by gorging on the rights of additional Tier 1 bondholders. He has solved LVB mess by nullifying the value of equity shares. Unfortunately, there is nothing in the PMC debacle that he can deprive someone of. So, the PMC saga drags on.

Majority of the banks are pulled out of the PCA framework so that they can continue with their dubious lending. Anyway, there aren’t going to be any NPA till next year, so why bother? All these populist band-aid measures further weaken the credit discipline and the trust factor in the Indian economy.

Courtesy Shaktikanta Das and RBI, nobody needs to pay what they owe.

The Future

When Operation Twist bonds become due, RBI will have the honour of the first central bank, globally, to default on payments.

Interest rate reductions lead to no fresh investments/loans, but more savings – a polar opposite to the intention.

When NPAs get reported next year, RBI to encourage ever-greening of loans in the name of helping the industry.

Expect Shaktikanta Das to become the next Finance Minister. He can then peacefully continue his project of single-handedly destroying the Indian economy, whatever is left of it, that is.