Silence, sound and action

What works in central banking? A balance between talk and action

- TAMAL BANDYOPADHYAY

Almost a decade ago, in September 2015, the Reserve Bank of India (RBI) had cut the policy repo rate by 50 basis points (bps) – twice the extent that was widely anticipated. The rate cut, the biggest in at least three years, brought down the repo rate to 6.75 per cent, the lowest in four and a half years. One basis point is a hundredth of a percentage point.

At the post-monetary policy interaction with the media, when someone asked the then RBI governor, Raghuram Rajan, whether he was playing the role of Santa Claus (known for bringing gifts to children on the Christmas Eve) his response was: "I don't know what you want to call me... Santa Claus... you want to call me hawk... I don't know. I don't go by this. My name is Raghuram Rajan, and I do what I do."

Why did he cut the rate by 50 bps? "We want to make sure that the word sustainable and growth go together. Both are important. That's why we used the room we had. But I don't think we are excessively aggressive. We were not throwing out the Diwali bonus."

The latest monetary policy has also gone for a 50-basis-point rate cut, double the anticipated reduction. It hasn't stopped there. Beyond the rate cut, it has also gone for a cut in banks' cash reserve ratio (CRR) – or the money that commercial banks keep with the banking regulator – besides changing the monetary policy stance from "accommodative" to "neutral".

Announcing the previous policy in April, the current RBI governor, Sanjay Malhotra, had said: "I am Sanjay, not Sanjaya of the Mahabharata, who can predict future rate actions."

Malhotra does not have the divya drishti (divine vision) to foresee distant happenings. His actions are based on what he sees and feels must be done now. In the past, we have seen both kinds of governors – one who would do what needs to be done and another who would wait for data to take actions in the future.