RBI: Picking up fights it cannot win

In his famous book Thinking Fast and Slow, Daniel Kahnemann cites a study conducted on football goalkeepers. That study deduced that a goalkeeper would be able to save more goals, if he chose to stay standing at one place. However, a goalkeeper, like most of us, will rather risk a goal than to face embarrassment (however imaginary) of audience seeing him not doing anything. Our RBI governor Subbarao seems to be in that position.

Subbarao, in his fresh bid to boost rupee has indirectly led to hike in interest rates. Apparently, every other central banker in emerging market is busy raising the interest rates to stem the fall of their currencies. RBI has also announced that it is soon going to sell bonds to suck out the excessive liquidity from the markets, which it believes to be responsible for volatile rupee.

Indian businesses and citizens are facing less than comfortable investment climate, delays in policy implementations, which has led to higher unemployment or stagnant wages, and not to mention RBI’s key enemy, the one on which it was focused on till now, high inflation. Then, Fed Chairman Ben Bernanke issued a statement talking about tapering of bond purchases i.e. reducing stimulus spending which led to FIIs started exiting emerging markets in droves, taking the rupee down with them. Apparently, the yield gap between US debt and Indian debt has been reducing, making the Indian debt less attractive.

Now, if you are RBI governor, would you rather focus on spending your reserves on fighting off fall in your currency, which is not just India-specific phenomena or you rather try to polish bright the India investment story (by way of easing off liquidity). It is a classic buyback stocks vs. invest in your own plant situation. I will choose the latter. What inflows you lose from debt markets, you can counter them from inflows in stocks or FDIs if you start rebuilding your fundamental story. And that will in turn will help the rupee, by way of improved sovereign ratings, investment climate etc. etc. But, that is just me.

No doubt, that RBI’s current actions have impeded the case for rate cut announcement on coming July 30 meeting, but my guess is that RBI is going to announce some compensatory measure in the form of small rate cut or cut in mandatory CRR, now the inflation data is largely range-bound and within RBI’s comfort zone of sub 5%.