Can RBI policy be the blueprint for world's central banks?

Passive inflation and the central bank’s full tank of gas make the case to cut even stronger.

Can RBI policy be the blueprint for world's central banks?
By Daniel Moss

India is becoming the gold standard for monetary policy in Asia, if not the world.

While global markets are giddy from hints that the Federal Reserve may cut interest rates, India’s central bank has been easing since February. Just as important, the Reserve Bank of India has been very consistent in its message: Borrowing costs need to come down to juice growth. Passive inflation and the central bank’s full tank of gas make the case to cut even stronger. After Thursday's trim, the benchmark rate is 5.75%.


The RBI's approach is correct. There’s no point targeting inflation if growth is waning and the very thing you’re aiming at is dormant. Thursday's quarter-point reduction in the benchmark rate, the third in as many policy meetings, underscores the theme: “Growth impulses have weakened significantly,’’ according to the central bank’s statement. “A sharp slowdown in investment activity along with a continuing moderation in private consumption growth is a matter of concern.’’ The RBI made clear that “global economic activity has been losing pace” & declared its stance to be “accommodative.” Much focus is rightly given to Beijing’s efforts to pull both fiscal and monetary levers; as big as India's economy is, China's is much larger. But the People's Bank of China tends to be opaque and is trying to thread the needle between buttressing the economy and fretting about financial stability. Japan, meanwhile, gets plenty of attention as a pioneer of unconventional policies – yet its economy remains a parable about how booms can end in tears. And remember back in February, the consensus was that the Fed had just paused before resuming hikes. Few serious observers believe that now.

So give Governor Shaktikanta Das his due. The RBI's rate cut in February was risky – few economists anticipated it – but appropriate. The signaling power was immense. Officials followed that up with another reduction in April. The outlook has only deteriorated since then. Central banks in Malaysia, the Philippines, Australia and New Zealand concurred. India was, and still is, ahead of the curve – all the more remarkable given emerging markets tend to follow the Fed. Even the chaos surrounding the withdrawal of most banknotes from circulation in 2016 has slipped from the foreground.

It's important to separate the manner of Das's arrival as chief and the job he's done since getting there. Prime Minister Narendra Modi's team clashed with Das's two immediate predecessors, which cast a whiff of politics over their exits. Das was drawn from the ranks of India’s bureaucracy rather than the central bank. It was clear the government didn't want any freelancing.
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For a while there, it seemed like the RBI chief’s office was a revolving door. Given Das’s success in monetary-policy development and execution, India would do well to keep him around. Quite right, too, given all the predictions for the country’s economic greatness. India needs this to succeed.
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