MPC yesterday - Jules Verne & Caesar's wife

Around the world in 112 days…

India’s 10Y benchmark bond yield closed yesterday at 7.13%, returning to levels last seen in mid-December 2017.  Yields have been through a remarkable roller coaster the past four months, reaching a dizzying peak of 7.78% in March.

This rise and fall in yields were caused more by the government, RBI and the MPC, than by other external factors or agents. Yields went up thanks to a higher borrowing program, tough love from the regulator (or a lifeline denied, depending on your point of view) and fiscal slippage, all leading to a market in sulk. Yields then reversed with a surprisingly lower H1 FY19 borrowing plan, an accounting lifeline finally granted (after all!), and yesterday, a set of literally underlined lower inflation projections from the MPC. 

So, did you enjoy the ride?

Some ongoing market volatility may actually be desirable, as a vaccine against complacency. But self-induced volatility on the back of policy reversals and messaging inconsistency can be a problem.  It can raise questions about the capacity of the folks in the cockpit to guide the market through real turbulence.

While the bond market celebrates Government, RBI and MPC largesse for now, as the MPC statement itself points out, the underlying uncertainties around the fiscal situation, external account, domestic and global context cannot be wished away by benign projections alone. 

We could stay in a lull for a while, but the ride may be far from over. 

Caesar’s wife

Before we come to inflation projections from yesterday’s MPC statement, a bit of a preamble. 

RBI is deservedly respected for its professionalism and willingness to assert its autonomy when it counts. One can question its policy decisions (as I have!) but one has never had occasion to question the institution’s good intent. 

Dr. Patel’s speech of March 14^th, forcefully reiterating the case for ownership-neutral banking regulatory powers for the RBI, evoked a few reactions. On one hand, one wished (and not for the first time) that the RBI and North Block would huddle in a room, thrash out any issues between them, and then come out and jointly address the many questions around banking governance. On the other hand, it felt good to see the Governor stand up to barbs from Delhi, and uphold the tradition of RBI as the professional counterfoil to the executive. 

Since then however, perhaps by sheer coincidence, we have seen the RBI reverse, relax or retreat from a series of previously stated positions.

- After chiding banks for seeking bond MTM forbearance just three months ago, the RBI has now granted bankers generous accounting leeway after all.

- RBI has paid an advance dividend of Rs 10,000cr to the government in March 2018. It had added to its balance sheet reserves and reduced its regular dividend payout in August 2017, and the government had since been asking for more. 

- IndAS implementation has been postponed by a year, and separately, the quantum of provisioning on cases referred to the NCLT has been reduced by 10% for the period ended March 2018.

- North Block now says it is confident that the stipulations of RBI’s February 12^th circular on resolution of stressed assets will be eased as well. Watch this space.

To be fair, there are arguments in favor of each of the above steps. But seen together, the reversals do raise questions. Do at least some of the above indicate the need to be thoughtful the first time around, precluding the need to rollback and risk credibility? Don’t at least some of the issues above – such as the government using the RBI to fund a fiscal shortfall - deserve a more open debate? 

Which then brings us to the MPC statement. RBI needs to respond comprehensively to analyst questions around the MPC statement’s lower CPI projections. Specifically, given the deterioration in and uncertainties around a host of fiscal and external factors, the lowering of H2 FY19 CPI projection by the RBI between the MPR of October 2017 and the MPC of yesterday needs to be better explained. 

It is inconceivable that the six member MPC would do anything other than uphold the RBI tradition of professional autonomy. But as with Caesar’s wife, the RBI and the MPC have not only to be pure, they have to be seen as pure as well. 

We cannot afford the market to look at the regulatory reversals, and then the MPC stance, put two and two together, and get twenty-two. 

Let’s chat

Which brings us to the final point – yesterday’s post policy press conference was remarkable for being as unremarkable as it was. Belying all the ongoing public debate on banking governance, no tough questions were asked, and no pre-emptive answers were provided. One wonders if such a sanitized messaging environment is the best approach in the current context. 

Given the credibility that the RBI enjoys, surely it would be better to have a little more open communication? By reiterating a few well-chosen, measured statements, RBI can perhaps both nip water cooler speculation in the bud, and help bolster and reinforce public confidence in the financial ecosystem, at a time when the public needs to hear some sane, soothing voices.