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EDITOR IN CHIEF- ABDULLAH BIN SALIM AL SHUEILI

Indians failing to read central bank policy

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Suvashree Choudhury & Rafael Nam  -


Benny Jose, a small-town caterer in Kerala, was closely watching the RBI meeting last week. Newspapers and markets were forecasting the Reserve Bank of India would cut its key rate by a quarter of a per centage point.


But the RBI held rates and moved to a “neutral” policy stance, signalling an end to India’s longest monetary easing cycle since the 2008-09 global financial crisis.


The move surprised Jose and crimped his expansion plans.


“We were planning to buy two commercial vehicles to transport food and were expecting a rate cut.


Now, we’re forced to defer that plan.”


He was not the only one wrong-footed.


Under Governor Urjit Patel, the RBI has significantly reduced communication with markets after he took over in September, an analysis of his public comments shows. Some critics say that a lack of clarity is pushing bond yields higher, and that in turn could send interest rates higher and restrain economic growth.


A government source familiar with the RBI’s thinking said that with modifications to the laws governing the bank and the introduction of a monetary policy committee, the governor was no longer sole arbiter of policy as prior RBI governors had been. His views would not be reflective of the entire MPC, added the source, who declined to be named.


In an interview televised on Friday, Patel told CNBC-TV18 that the RBI was open to “valid” criticism.


“It’s important that one grows thick-skinned fast in this business and I think we have done that,” Patel said.


“We have gone about our work.


We had undertaken major challenges during these past few months and valid criticism is something that we are open for and we take it in the spirit in which it is given and try to improve ourselves.”


Central bankers around the world keep moves in benchmark interest rates a closely held secret before they are announced, but governors and other senior policy makers tend to guide markets, helping to avoid surprises that may cause volatility.


In his first five months in office, during which Prime Minister Narendra Modi abruptly abolished high-value currency notes and roiled economic activity, Patel gave nine public speeches or press conferences, according to Reuters analysis. That was well below the level of his two predecessors in comparable periods of their tenures.


Moreover, Patel has presided over three rate decisions so far, and a majority of economists polled by Reuters before the decisions got it wrong each time.


Under both his predecessors, most economists accurately called the rate direction in the large majority of cases.


“The government’s trying to boost growth that’s been hit by demonetisation, but central bank communication is working in the opposite direction,” said a senior Mumbai-based treasury banker, who asked not be named. Some market watchers say it is early in Patel’s tenure and that he should be given more time.


“He is dealing with... the most radical executive decision in modern India’s monetary history. In all fairness many are being too harsh on him,” said Nishant Berlia, management board member at Apeejay Stya investment group.


In December, benchmark 10-year bond yields rose at their fastest pace since the 2013 rupee crisis. And last week’s surprise move to a “neutral” stance sent yields up by 30 basis points.


Some traders said insufficient information about the RBI’s thinking was one of the main reasons for the rise.


The sharp increase in yields has meant a lost opportunity for state-backed transmission company Power Grid Corp, which had decided to wait for a rate cut before issuing bonds to finance capital expenditure, said Ajay Manglunia, head of fixed income markets at Edelweiss, one of the underwriters. — Reuters


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