Off the Beat What Subbarao Says is as Important as What He Does

Besides cutting CRR or lowering rates, the central bank should show a pro-growth bias One hears that this time around Mr Subbarao and his team have read and reread the policy draft many more times than they usually do, tweaking the language endlessly before giving the final go. Often attacked for doing the right thing at the wrong time, they don't want the world to misinterpret them. Indeed, his choice of words is as crucial as the measures he takes (or doesn't take).  Growth expectations have come down to a level where his policy stance, the underlying bias — growth or inflation, and hints of what the central bank may do next, will matter more than ever.  If Mr Subbarao devotes too much time to convey how worried he is about inflation, or does some token policy-easing and drops a hint that 'that's it and no more' — as he has done earlier — there is a risk the market may fear that inflation (and not growth) remains his biggest obsession. If he cuts rates and promises to cut aggressively in the coming days — which few think he will — he may be perceived as someone who has succumbed to PM's pressure and is no longer as serious as he was in controlling inflation. Both messages can be equally damaging.  There are two pitfalls. First, higher inflation, even if it's temporary. With growth dipping, it's a matter of time that a part of inflation — known as core inflation that excludes volatile prices like food and fuel — will come down. But before that happens, headline inflation — the number that the media talks about all the time — will flare up once prices of diesel, coal and power go up. At that point, will RBI have to take the blame? Second, how will overseas investors interpret a rate cut? The text-book linkage between higher rate and stronger currency does not work in India due to limits to which foreigners can invest in Indian bonds. Here, a rate cut may improve growth expectations and encourage FIIs to invest more into equities. But if offshore portfolio managers stick to the view that New Delhi is not yet ready to act, they may continue to sell and pull down the rupee further. If that happens, RBI will face the flak for either getting it wrong or not doing enough. What, then, should the Governor do? Perhaps, he should take advantage of greater political stability and lower commodity prices to send out a signal that the central bank will cross the river by feeling the stones; that he will do his bit, whenever he can, to support growth. Cut cash reserve ratio to increase money supply, raise deposit growth and make it easier for banks to lower lending rates. Banks took a long time to lower rates because deposits weren't growing fast enough to feed the loan growth. Loans grew partly due to higher oil credit and more lending to procurement agencies buying food grains from farmers. Some of this loan growth will soften now. Indeed a cut in the policy rate will not mean much unless it's accompanied by a cut in CRR — the slice of customer deposits that banks set aside as cash with RBI. Technically, just a CRR cut, even if by a quarter point, will help.  Whether he cuts the CRR by 25-50 basis points or uses both tools will depend on how he chooses to do the balancing act and how long he thinks inflation will play out. But a bias in favour of growth may silence Mr Subbarao's critics, avert a sovereign downgrade and strike a note that will be similar to what the next FM may think. It can certainly be a way to make his final year in RBI memorable.  sugata.ghosh@timesgroup.com