Monetary policy is a spectator sport. It wasn’t always. Once upon a time, the actions of the central bank only electrified dealing rooms and jumpy traders. Today, they stir the hopes and ruffle the plans of homemakers, school teachers, shopkeepers and pensioners who react like never before when interest rates change.
Household debts are well over 40% of GDP, up from about 30% a decade ago. Homes bought with borrowed money are the most longed-for asset after gold. With more people trusting the stock market to lift their fortunes as secured fixed-benefit pensions fade away and a high tax claws away meagre returns from FDs, RBI faces a vocal and burgeoning constituency.
A faceless multitude, anticipating that life won’t get any tougher, absorbs live TV commentaries, text messages from banks and brokers, and the rise and fall of stocks that follow policy announcements. It can overwhelm a central banker already dealing with nudges from GoI and unrealistic expectations from corporates.
As governments have become less reliable, expectations from monetary authorities—often perceived to be more powerful than they are—have soared. Like in the days after the global meltdown, central banks have regained some of their lost ground in recent years by giving out forward guidance and handholding markets since Covid. But while they are expected to deliver, sometimes the unachievable, they have a bewildering job in a world that is more unpredictable and even threatening to alter the economic order that generations never questioned.
In such a world, a central banker, particularly someone who is yet to fully grasp the lay of the land, is tempted to experiment, make a quick difference, and thus walk into a spot, leaving markets confused and everyone guessing what he would do next. That, many believe, is where Sanjay Malhotra finds himself now.
As the new governor, Malhotra wanted to leave his mark. In June, he surprised markets with a half-point rate cut (against the widely expected quarter-point) coupled with a reduction in the reserve ratio, which released liquidity by letting banks park less cash with the RBI. He reminded many of Shaktikanta Das who, less than a year after joining, took the unorthodox step of lowering the benchmark interest rate by 35 basis points, a departure from the convention of changing rates by either 25 or 50 points.
More significantly, Malhotra changed the policy ‘stance’ from ‘accommodative’ to ‘neutral’. A stance in monetary policy is somewhat like the ‘outlook’ in a sovereign rating. Roughly put, the market interprets ‘neutral’ as either a hike or cut in the next policy, compared with either a cut or status quo under an accommodative stance. For Malhotra, ‘neutral’ was possibly a hint that there would be no cut in August, and perhaps a way to keep the doors open to a slim chance of a hike if tariffs or crude prices hardened. But since June, inflation has fallen a little more than expected. And, with Malhotra having said that RBI would be ‘data dependent’, the obvious question to crop up is: shouldn’t he cut rates in August? With early festivals, when usually loans take off, shouldn’t RBI make the most of the space created by softer inflation? RBI may prefer banks and borrowers to absorb the earlier actions, which could take 3 to 6 months to play out, before cutting again. But would that risk missing out on an opportunity to boost demand? Are lower rates the real trigger for borrowers? And should central banks become more light-footed and flexible with shorter pauses, reacting as and when surprises are thrown at them? There are no easy answers, though perhaps few would have raised questions had RBI let its stance remain ‘accommodative’ in June.
Interest rate actions are transmitted through bank loans and bond prices, which haven’t fully responded to the June measures. Loan demand is yet to pick up, and banks have parked idle funds, for which they could not find enough borrowers, with RBI.
And, with the central bank mopping up unused liquidity, the interbank rate, a key money market indicator, hasn’t dipped beyond a point. Having taken the uncommon step in June, there’s only so much the central bank can do.
The unfolding story is a reminder that GoI, businesses and consumers must temper expectations from RBI, which, in turn, should not shy away from spelling out its limitations in a world of mercurial presidents, climate change and a looming battle of tariffs and currencies. Financial markets must realise that the central bank’s forward guidance, which they have become so used to since the pandemic years, won’t last forever. And, like everything else, monetary policy, too, can change.
Household debts are well over 40% of GDP, up from about 30% a decade ago. Homes bought with borrowed money are the most longed-for asset after gold. With more people trusting the stock market to lift their fortunes as secured fixed-benefit pensions fade away and a high tax claws away meagre returns from FDs, RBI faces a vocal and burgeoning constituency.
A faceless multitude, anticipating that life won’t get any tougher, absorbs live TV commentaries, text messages from banks and brokers, and the rise and fall of stocks that follow policy announcements. It can overwhelm a central banker already dealing with nudges from GoI and unrealistic expectations from corporates.
As governments have become less reliable, expectations from monetary authorities—often perceived to be more powerful than they are—have soared. Like in the days after the global meltdown, central banks have regained some of their lost ground in recent years by giving out forward guidance and handholding markets since Covid. But while they are expected to deliver, sometimes the unachievable, they have a bewildering job in a world that is more unpredictable and even threatening to alter the economic order that generations never questioned.
In such a world, a central banker, particularly someone who is yet to fully grasp the lay of the land, is tempted to experiment, make a quick difference, and thus walk into a spot, leaving markets confused and everyone guessing what he would do next. That, many believe, is where Sanjay Malhotra finds himself now.
As the new governor, Malhotra wanted to leave his mark. In June, he surprised markets with a half-point rate cut (against the widely expected quarter-point) coupled with a reduction in the reserve ratio, which released liquidity by letting banks park less cash with the RBI. He reminded many of Shaktikanta Das who, less than a year after joining, took the unorthodox step of lowering the benchmark interest rate by 35 basis points, a departure from the convention of changing rates by either 25 or 50 points.
More significantly, Malhotra changed the policy ‘stance’ from ‘accommodative’ to ‘neutral’. A stance in monetary policy is somewhat like the ‘outlook’ in a sovereign rating. Roughly put, the market interprets ‘neutral’ as either a hike or cut in the next policy, compared with either a cut or status quo under an accommodative stance. For Malhotra, ‘neutral’ was possibly a hint that there would be no cut in August, and perhaps a way to keep the doors open to a slim chance of a hike if tariffs or crude prices hardened. But since June, inflation has fallen a little more than expected. And, with Malhotra having said that RBI would be ‘data dependent’, the obvious question to crop up is: shouldn’t he cut rates in August? With early festivals, when usually loans take off, shouldn’t RBI make the most of the space created by softer inflation? RBI may prefer banks and borrowers to absorb the earlier actions, which could take 3 to 6 months to play out, before cutting again. But would that risk missing out on an opportunity to boost demand? Are lower rates the real trigger for borrowers? And should central banks become more light-footed and flexible with shorter pauses, reacting as and when surprises are thrown at them? There are no easy answers, though perhaps few would have raised questions had RBI let its stance remain ‘accommodative’ in June.
Interest rate actions are transmitted through bank loans and bond prices, which haven’t fully responded to the June measures. Loan demand is yet to pick up, and banks have parked idle funds, for which they could not find enough borrowers, with RBI.
And, with the central bank mopping up unused liquidity, the interbank rate, a key money market indicator, hasn’t dipped beyond a point. Having taken the uncommon step in June, there’s only so much the central bank can do.
The unfolding story is a reminder that GoI, businesses and consumers must temper expectations from RBI, which, in turn, should not shy away from spelling out its limitations in a world of mercurial presidents, climate change and a looming battle of tariffs and currencies. Financial markets must realise that the central bank’s forward guidance, which they have become so used to since the pandemic years, won’t last forever. And, like everything else, monetary policy, too, can change.
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