Many years ago, I went through a very brief – and eminently unsuccessful – period of being a theatre actor. I was living in New York, where everybody was an actor or an artist – this is long before Wall Street became sexy – and, having just quit my job, happened upon an opportunity to – get this – play the lead in an off off – very off – Broadway show.
I went to audition, and, despite the fact that I don’t know anything about acting – my wife will tell you that I am genetically unable to take direction – I got the part, playing opposite the director’s wife. There is a strange story behind that, but that’s for another time (and, perhaps, publication).
Anyway, we got started, and after a couple of rehearsals, the director – a Malaysian fellow, who I remarkably re-encountered recently after some thirty years – frustrated at my inability to create a character in any way different than myself, suggested we have a few training workshops.
We met the next day, just two of us in his living room. We started out with an exercise, where I was to internalise news I had just received that absolutely required me to leave the room but I wasn’t to tell him why; correspondingly, he had to keep me in the room at all costs.
So, we began. I tried to push past him and he held me back – no violence or strength, just an exercise. I tried this repeatedly, and each time he held me back. Finally, frustrated after seven or eight attempts, he said, OK, let’s reverse roles.
He tried to push past me and I held him back. He tried again; again, I held him back. Then, he suddenly pointed out of the window and shouted, Look at that. Distracted, I looked away, and he slipped out.
Lesson: If you need to achieve something, but pushing steadfastly on the most obvious lever doesn’t work – indeed, appears to have no impact at all – change tack and try something different.
Hardly earth-shattering, but often the most obvious truisms need to be relearned again and again. RBI has been edging rates doggedly higher – 12 times since March 2010 – but inflation is still loudly in the room. The classic approach did appear to work at first, with inflation coming down nicely till November, by which time industrial growth had started showing signs of stress. After that, however, despite RBI’s steadfastness – let us kill inflationary expectations – inflation has started climbing again and appears to have stabilised just below double digits.
Till recently, I had felt that RBI was on the right track – inflation hurts the poorest the most and so, in a country like India, policy should err (as, by definition, it will) on the side of hawkishness on inflation. Blinded by this other truism, I paid scant attention to Kaushik Basu’s as-usual-sound comments (recently silenced) that as strong growth is redistributed, we may need to live with somewhat higher inflation. Indeed, the government’s redistributive policies as part of its inclusive growth mantra – notably, the NREGA – has, indeed, resulted in higher rural incomes. This was highlighted to me recently by the fact that even as fertiliser prices have shot dramatically higher, demand at the farm gate is still hugely overwhelming supply. Clearly, farmers – or, I should say, some farmers – are not hurting, despite the higher inflationary environment.
Then, of course, there is the fact that higher interest rates have no impact on inflation caused by supply constraints – indeed, they could worsen the situation. Added to this is the recent recognition that China – what a way the world turns – is now exporting inflation; again, something higher domestic rates can only exacerbate. Then there is the point raised by Surjit Bhalla that if we shorten the cycle of inflation measurement, prices are not rising anywhere near sharply enough to warrant further tightening. Indeed, given the increasingly dynamic nature of the world today, perhaps this measurement issue should be carefully considered.
The market, too, is saying enough. The devolvement of the last G-Sec auction is a case in point. The inability of the rupee to take advantage of the recent Euro strength (dollar weakness) is another. The continuing demand for foreign currency borrowings, despite extravagant spreads over LIBOR, is a third.
Finally, and perhaps most importantly from an operational perspective, the populace at large and, in response, the politicians appear to be more focused on corruption and governance than prices – just the opportunity for RBI to surprise us all, stand pat, and see what happens outside the room.