RBI shoulders arms: Sajjid Chinoy

In the cricket-crazy nation that India is, a batsman shouldering arms - playing no shot and letting the ball go outside the off-stump - is considered a non-event. But to cricket connoisseurs, it isn't. It often reveals more about a batsman's technique than playing a shot does.

The Reserve Bank of India (RBI)'s policy on Tuesday was tantamount to shouldering arms. As markets expected, RBI stayed on hold, signalling that the unconventional monetary tightening was meant to be temporary. Yet, markets (irrationally) come to believe RBI would spell out some sort of an exit policy. This was always going to be an unrealistic expectation. The whole point of the measures is to disincentivise speculative activity, influence the inter-temporal behaviour of exporters and importers and anchor rupee expectations. If the game plan is to induce behavioural changes in the market, an element of constructive ambiguity is critical. If RBI were to set a date for withdrawal or lay out a specific criterion, the economic agents it is trying to influence will simply wait it out in anticipation.

But RBI's inability to provide a timeline for exit has further fuelled the debate on the efficacy of the tightening measures. 'Are there measures working?' runs the exasperated refrain.

Sceptics exist on both sides of the spectrum. Some worry about the impact of these measures on growth. It is undoubtedly the case that if these measures stay beyond a few weeks, they will have a collateral impact on growth. But what about the counter-factual? A sustained weakening of the rupee is also growth-negative in the short run - stressing unhedged, corporate balance sheets, fuelling more inflation and thereby squeezing consumption, and vitiating sentiment and ratings as the fiscal consolidation becomes more challenging.

Sajjid Chinoy
India Economist, JP Morgan