Government removes the cockroach

In this interview with Reuters, Jayant Sinha, India’s Minister for State for Finance, says that regulation of the government bond market would stay with the Reserve Bank of India. Good stuff. In my piece on the Indian Federal Budget for Pragati, published on 9 March 2015, I had accused the government of being guilty of not applying its mind in its dealings with the Central Bank and called it a ‘cockroach in a bowl of cherries’ (borrowing a phrase from Daniel Kahneman’s book, ‘Thinking Fast and Slow’). The government is in the process of removing the cockroach. We need to see what happens with the composition of the Monetary Policy Committee and how it goes about capital account convertibility, an idea that has come back into the mainstream now.

If India pursues capital account convertibility, then the question of who regulates capital flows (either in line with the hair-splitting recommendations of the Financial Sector Legislative Reforms Commission or otherwise) becomes irrelevant. So, the thought does arise as to whether the unchanged stance on regulation of government bonds is linked to the revived discussion of capital account convertibility.

Regardless of the answer to that question in my head, I am clear that one of the most important pre-conditions – besides domestic fiscal policy, its stability and elevated potential GDP growth – is the ‘return to normal’ of monetary policy settings worldwide. That is not in India’s hands. Further, right now, the world is moving in the opposite direction.

These remarks – attributed to Mr. H.R. Khan, deputy Governor of the Reserve Bank of India – are bang on target:

I must point out that BCD nexus is neither absolutely necessary nor a sufficient condition for mobilising resources for investment to support economic growth. I will just have to point out the growth story of post-war Japan, that of China of last two decades and even of India before the crisis to support this point… [Link]

So, India had better attend to many other urgent issues/risks – monsoon, drought, inflation, fiscal deficit, productivity, potential growth – before it takes up capital account convertibility.

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