C’mon India’s MPC, Take a Holiday to New York & Jamaica!
Unlike the American Federal Open Market Committee, our Monetary Policy Committee lacks the voice of a risk-taker.
Come September, India created two cynical world records. We hit the highest GDP contraction among large economies and cleared the 80k/day ‘hurdle’ of COVID-19 infections. But for now, I shall swivel to other crises zones, with the promise to tie it all together, organically. So, stay right here and do read on.
Life-And-Death Calls of Leadership
A fatally wounded soldier lay dying on the table. But tragically, the surgeon’s instruments could be contaminated.
What if he uses the possibly infected scalpel and causes gangrene? Will he be convicted for culpable homicide?
The doctor calmly removes the bullet.
A fire chief faces an angry blaze consuming a tall building with hundreds of trapped victims.
Unfortunately, his fire hose is stuck. Should he draw ‘inflammable’ water from the adjoining chemical factory’s reservoir, and risk a fatal blowout?
He calmly asks his boys to spray the water from the factory.
Captain Chesley “Sully” Sullenberger (played by Tom Hanks in the gripping film “Sully”) confronted a life-and-certain-death choice on 15 January 2009. His Airbus A320-214 had just taken off from LaGuardia airport in New York City when bird hits destroyed both engines.
If he tried to glide back to base or to Teterboro airport in New Jersey, he could crash into Manhattan’s skyscrapers.
He calmly decided to belly-land in the freezing Hudson river. All 155 passengers were safely evacuated in the most chilling aviation rescue in living memory. Captain Sully was tried by America’s air safety regulators for making a potentially fatal misjudgment. But in the eyes of those he saved, he was a hero like none other.
What’s common in the three situations above? In each, the leader had to make a split-second call. The options were:
- Play safe, take the conventional option, let fatalities occur, but escape future blame and punishment; Or,
- Make a risky call, try to save lives, but expose yourself to failure and opprobrium. The choices were outside the textbook - but if you held your nerve, you could rescue doomed victims and give them another shot at life
In fact, there are two kinds of professionals in this world – those who deal with real risk, and others who work in a thought bubble, quite remote from the ugly choices of danger/destruction. Often, the former are confined to a narrow category of ‘action professionals’, while the latter occupy a broad spectrum of ‘thinking and policy-making’. I will argue that such a distinction can be lethal and self-defeating.
‘What-If’ India’s Monetary Policy Committee (MPC) Had a Few Risk-Takers?
But for now, I shall swivel to Mumbai, where six eminent members of India’s Monetary Policy Committee (MPC) met virtually to take a call on interest rates.
The Governor, a retired IAS officer, led the team comprising two career RBI officers and three academicians. Conspicuously, the MPC did not have any person who may have faced the wrath of the real economy, either an entrepreneur or market investor.
Yet, each member could feel the economy beginning to keel over.
Clearly, interest rates, stubbornly stuck at around 5.75% for 10-year treasury bonds, had to be slashed to stir demand. But there was a wrinkle: just as our conflicted surgeon had to work with an infected scalpel, the MPC members had to deal with an inflation number that was rearing around 6-7%, albeit based on highly suspect data because of the COVID-19 lockdown.
And, like the fire chief who had to risk spraying inflammable chemicals to douse the fire, the MPC members had to figure out if they could ignore elevated food and fuel prices, which are impervious to interest rates.
Finally, like Captain Sully, the MPC had to “land on the Hudson river”: it had to acknowledge that given the extra-ordinary economic contraction, it must wilfully violate its inflation mandate and plump for growth.
Risk Averse MPC’s Policy Blunder
To borrow a cliché’, exceptions only prove the rule. So instead of mechanically sticking to an inflation mandate that was drafted for ordinary times, the MPC ought to have understood that an exceptional situation demanded an exceptional, not the mandated, response.
Unfortunately, that was not to be. The MPC stunned markets by almost confirming that it could increase interest rates if the inflation meter stayed erroneously stuck at that high figure.
It was surreal. Bond prices crashed, interest rates leapt by 40 basis points, and investments? Well, they threatened to stay in the doldrums.
Postscript: within days, RBI was forced to do some ‘jugaad’ (hasty quick-fixes) to retrieve this blunder, which only under-scored the MPC’s policy miss-step.
In Contrast, Half of US Federal Open Market Committee (FOMC) Are Risk-Takers
Let me swivel once again, to the FOMC meeting in New York. Chairman Jerome Powell, once an investment banker with Davis Polk and Carlyle, led the deliberations of his ten-member team, comprising two career Fed officers, three academicians, one career bureaucrat, two Goldman Sachs’ veterans, and another investment banker of Davis Polk and Carlyle vintage.
Allow me to emphasise the team composition once again – half of them are professors/bureaucrats, the other half are dyed-in-the-wool commercial veterans.
If you compare the minutes of the MPC and FOMC meetings, the jargon/phraseology is uncannily similar:
- On inflation, MPC said ‘upside risk to food prices remain’; FOMC noted that ‘consumer prices had turned up after having fallen in March and April’
- On GDP, MPC said ‘real growth is expected to be negative’; FOMC noted that ‘it is expected to be somewhat less robust than in the previous forecast’
- On consumer demand, MPC said ‘expected to remain anaemic’; FOMC noted that ‘household spending on discretionary services would likely be subdued’
Yet, despite such equivalence, MPC and FOMC have arrived at diametrically opposite actions:
- While MPC is talking about increasing rates, FOMC is vowing to keep them near zero for several years to come
- MPC is playing didactically by the textbook, refusing to acknowledge that the crisis is beseeching policymakers to take calibrated risks
- FOMC is assuring markets that if required, it shall err on the side of excess, because it’s sensible to risk a higher inflation than slide into an irretrievable recession
Retired Bureaucrats Should be BANNED as Specialist Sector Regulators
You know what, I am going to do one more swivel, but this time back in time. I was invited by a post-liberalisation prime minister of India to pitch ideas that would “strengthen second generation reforms”. Without batting an eyelid, I said “ban the appointment of retired bureaucrats as specialist sector regulators. Instead, pick experienced domain experts from the private sector to give our reform story fresh booster shots”. Unfortunately, the prime minister nodded, but not much else happened.
The parallels I’ve drawn between RBI’s MPC and US Fed’s FOMC is an illustration of that continuing malaise.
Since our MPC is made up entirely of bureaucrats and academicians, it lacks the voice and vision of a risk-taker, a contrarian, a doctor/fireman/pilot/entrepreneur who is willing, in an exigency, to take a leap of faith, into the unknown, than stay hand-cuffed.
Had that been the case, perhaps our MPC would have cut the Repo by 50 basis points instead of signaling a self-defeating increase in interest rates!
My Last Swivel, to a ‘Bindaas’ Central Bank
And now I promise to make my last swivel. Here, please click through and see this music video.
It’s made by the Central Bank of Jamaica, which, too, has cut its interest rate to historic lows of 0.50%.
Just see how dull policy-making bodies are livening up with rap and rock, glamour and style! C’mon India’s monetary economists, it’s about time you, too, had some fun with gully boys.
And, of course, do cut the interest rates, pleeaaasssseee!
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