RBI policy review and my views

There is excess liquidity for sure both in the Indian and Global financial markets today. Thanks to the near zero interest rates in the developed world; it is felt that the developing world is sitting on asset pricing bubbles. So it is more interesting to notice how these bubbles can be spotted today. The 20% food price inflation is not just a problem in India, but the rest of the developing world as well. Also the stock market was defying all logic 3 months ago, but recent quarter results have quelled some fears of over valuations. Moreover even commodities including oil have staged an upward trend in prices, even though the developed world is still healing its wounds. Thus it is a very difficult situation for the RBI to be in today, especially to be overseeing the global economic rebalancing also taking place in Asia’s favour.

Governor Subbarao has dishonourably failed on his most important job of controlling inflation and maintaining the value of the note he himself signs. Such high inflation in a recovering economy can spell misfortune in subsequent cycles.

The inflation is putting increasing pressure on the economy and the common man, which is not a sign of healthy recovery. Also foreign flows of capital into India have been touching enormous amounts, and the weaker dollar is a nightmare for the exporters and RBI alike. But it was as expected that on Friday, 29^th January 2010 the RBI hiked its CRR by 75 basis points, as looks to mop up Rs. 36,000 crores of excess liquidity. RBI had indicated in its previous policy review in Oct 2009, of its intent to gradually withdraw monetary support, but had just increased the SLR back to 25%.

I was expecting 50- 100 basis point hike in CRR, and along with it increases in Repo rates as well. My analysis proved worthy on two grounds. First, the CRR rate would have been increased in a calibrated and gradual manner instead of giving sudden shocks to the financial systems. Second, the RBI would have succumbed to Manmohan Singh’s cabinet to control inflation.

However I do not expect a rise in bank rates and other rates too soon, because then the RBI leaves the door open to even more foreign capital inflows. This would nullify the desired outcome as more money would still be chasing the same amount of commodities. Also it will further cause the rupee to be more susceptible to the volatile dollar currency markets as the foreign investors would be looking to hedge their currency risks and attracting more speculative movements.

Could do better

Although we all feel that the RBI has done well enough to save the economy in the crisis and its previous prudent polices have indeed protected the banking system, but to me its recovery management has failed in many ways. Firstly, India witnessed a slowdown, not a recession, so the work was already half done. Secondly, the earlier populist fiscal policies of the government were more than a helping hand to its monetary policies. RBI’s ineffectiveness was visible initially (in last quarter of 2008) where banks refused to bring down their lending rates; especially at the time economy needed the most. Thirdly, its failure to control inflation is big embarrassment for the usually pompous banker. Governor Subbarao has dishonourably failed on his most important job of controlling inflation and maintaining the value of the note he himself signs. Such high inflation in a recovering economy can spell misfortune in subsequent cycles. What and how it unfolds precisely is difficult to predict just like today’s economic crisis.

A World Oft Forgotten

Within the mainstream news these days, two parallels clearly emerge, the success of developing economies such as India and China, contrasted with the failure of erstwhile capitalist western nations. But sadly the third world remains the ‘third’ world which is still reeling under the bandits of economic growth: high poverty, low literacy, religious fanaticism and administrative inefficiency. It is as if there is no place for this third world on this planet. The everyday East-West comparison in newspapers and journals woefully neglects their presence. Globalization and its benefits are completely absent from the region. They do have footprints of globalization, but as dumping grounds of the products not suitable for the aforesaid two worlds.

As I am writing this blog post, a family somewhere in the far neglected corners of the world is being pushed below the poverty line. To my interpretation, the rise and revaluation of poverty line measures in such regions have been higher than the effective number of people coming out of poverty.

They do have footprints of globalization, but as dumping grounds of the products not suitable for the aforesaid two worlds.

Today the world has changed more than we can grasp in one go. New measures need to be employed to pull up such neglected and backward regions.  First on my mind is the need to shift from macro initiatives to the micro level. Focus should shift to micro-level programmes like micro-lending which have done so well in emerging countries. I feel that measuring and monitoring micro level support plans can be monitored and evaluated more easily and quickly.

Second, would be to eradicate “energy poverty” as coined by Thomas Friedman in Hot, flat and crowded. In simple terms, to enable the masses to fulfil their aspirations by giving them secured supply of electricity. Today, any rural programme even the basic ones from education to vaccination drives require electricity. Overcoming the third world’s inability to connect to the globalised world will be a big step in helping grow confidence.

There are many more measures which are being talked about. But these are the major recommendations which I feel are indispensable. The third world needs to be given more attention. But with tightening budgets of major donors in the West and exploitive bargain hunters of the East, I feel my worst fears for them are going to be true. 

No wonder they pray so much.

Reforming the Media: Influences & Suggestions

Media Corporations are getting bigger and bulkier than before, as they try to capture market share of multiple platforms of radio, print, television, movies and internet. The competition is high, margins are small and their business cycles are dynamic. There is so much stress and competition that today news reporting can be easily influenced in cash or kind. Let us see the various mechanisms of influence

1. Direct ownership: In many of today’s media corporations number of companies or interest groups have stakes in ownership and management. Shifting their focus to shareholders satisfaction and biased news coverage at times.
2. Influence of Advertising companies as clients: To keep their shows and prints running, media companies need advertisements. Thus media companies have to service their relationship with clients and that does imply a favour here and there.
3. Knowledge & data processes: You may have seen on business channels on tv, smartly dressed people with big company banners sharing their thoughts on the markets, which are as volatile as the market itself. Media needs these industry thinkers to lend credibility to their shows, but then it makes the audience credulous to their views.
4. Pre-existing political influence: Media thrives on the news makers and politics is very much intertwined with media coverage. Barack Obama showed us the power of social media in the US Presidential elections last year and I feel all of our Indian politicians are no less then drama queens. It is very well prevalent observation that India’s biggest print newspapers are lenient towards different ideological political parties.

Moreover, large advertisers can influence even competing media outlets by threatening to withdraw their advertising; numerous small advertisers can exert influence if they share a common interest and can coordinate (e.g., when represented by an advertising agency). As a result, media competition alone is not always sufficient to prevent commercial media bias.

The Possible Solutions

There maybe many more ways of influence, present but what is more important is to see what all can be done to improve news reporting, specifically financial journalism. I have certain measures in mind, radical they may seem but radical change is the need of the hour.

Firstly, removing advertising from public TV stations as imminent in France and Spain. This reduces commercial bias of their content and pressures their competitors to reduce bias; it also shifts ad revenues to private media, complementing plans to subsidise media consumption and media entry.

Secondly, making the consumer or viewer or reader more aware that certain views and opinions of this show or column maybe biased. This can be done by running a disclaimer before or during the programme, reminding viewers that it is just an opinion, not advice.

Thirdly, moral suasion is what is most required and most practical. Readers should advocate more investigative journalism, especially in business and finance. This should prevent scams like Enron or Satyam to ever happen again. Most importantly nip improbable frauds and thefts in the bud, and prevent full blow ups in the future.

Another important step would be to remove views or suggestions from the main report and keep them collected on a few pages or a different show. An easy example is the ‘Times View’ section in India’s leading English daily, which comes along with the news event; at times even on the front pages. This is bad journalism, as it induces the reader to opinion of the newspaper, rather than give him time to formulate his own. Opinion sections like these should be put in separate pages of the editorial.