From now till about the end of May this year there is only act in the town and that is the Reserve Bank of India. Some of the things which could happen under its watch in this period are that US Fed will withdraw from its easy money stance at a faster clip, the mystery of China’s growth numbers unravels to show if it grew at even 7.7 per cent in 2013 and so whether the downward pressure on the world markets is higher and does all of these rolled together make the emerging market economies tank further.
These are the hotspots we know about now. But there are others of which we know nothing about like the possibility of a meltdown in the domestic markets. It could happen if some companies faced with a clearly higher interest rate regime finally keels over under its debt load (remember Satyam). India Ratings data released on Tuesday shows the of stressed corporates in the BSE 500 will creep up to 10.7 per cent from the current 9.5 per cent because of the 25 bps increase in repo rate.
Suppose it is a choice between saving rupee and facing corporate defaults if global conditions worsen in the run up to the elections. These will not remain as tail risks.
This is the reason why between the rate hike and the decision to hold the review of the policy with a two-month lag instead of the present 45 day cycle is the one with more consequences, at this stage. In the older cycle Rajan and his team would have taken stock of the economy twice, before the new government came to power and settled down. But now the persisting stagflation scenario in the economy will be publicly examined just once when a government in New Delhi is all but absent.
If anyone thinks this is scare mongering just needs to read up on the days of the Chandrashekhar government before the 1991 elections. Fairly similar conditions prevailed in the middle of last year; it took both the finance ministry and the RBI to deploy some drastic steps to ring fence the economy. Between now and June it is only the latter.
And Rajan will have only one policy variable available to deal with any economic disturbance — the rate of interest to be deployed only once — till the end of May. One just wishes that at this juncture the central bank had kept more room available with it to use it more often.
The other levers of policy including fiscal tools are all but dead in the interregnum. More so because this government at the Raisina Hill now exerts far less moral legitimacy than any one did in a long time, in the run up to a bruising general elections. Rajan should have allowed for more frequent reviews in this time table till normal service is restored in New Delhi.
Subhomoy is a deputy editor based in New Delhi.