Tags:
Journalism of Courage
The annual credit policy for 8217;06-8217;07 was announced by RBI Governor Y.V. Reddy on April 18. While analysts were predicting a small hike in interest rates, Reddy surprised everyone by keeping rates unchanged. In an era where credit policies have become old-fashioned as central banks respond to changes in the economy as and when they unfold, this quarterly RBI event on pre-announced dates can at best be described quaint. The tradition and ceremony with which the governor and his team disappear behind closed doors to talk to bankers for an hour when the policy is not released to the public is part of the drama of maintaining secrecy.
Interestingly, in an age where managing expectations has become one of the prime objectives of modern central banks, the RBI does not cease to surprise the market. This is in complete contrast to what happens internationally. For example, when Alan Greenspan felt that inflation in the US was rising, he shared his views with the country. For months he said that he would raise interest rates. For months observers watched and waited, hanging on to his every word. The question became when and not whether. The economy consequently was well prepared for the Fed rate hike when it came. It was a small hike, followed by more speeches by Greenspan about raising rates. Over the last two years, in many small steps the US Fed rate has been hiked from 0.5 per cent to 4.75 per cent. The important element of this strategy is managing expectations. The strategy helps cushion the economy from shocks. Households taking loans should know what to expect and factor it into their decisions. Firms making investment decisions should factor in RBI8217;s plans.
