The RBI could take a leaf out of the Bank of England’s book when it comes to communicating clearly. Here's an attempt to make the RBI policy language simpler.
The Union Budget may be the most watched and debated policy, but few have the potential to shape monthly household budgets as much as the RBI’s periodic credit policy reviews.
While many cannot immediately recollect the sitting RBI governor’s name, and yet, as an institution, the RBI has a far greater recall value, besides a stronger connect with the person on the street because changes in interest rates affect everybody at some point.
So it is all the more surprising that the credit policy document does not give the impression of having been written keeping the average borrower or saver in mind.
The RBI could take a leaf out of the Bank of England’s book when it comes to communicating simply, which also usually translates to clearly. In fact, one of the stated goals of the Bank of England’s Monetary Policy Report is clear communication. The summary of the latest report can be viewed here.
Here is a sample of how a technical concept has been explained so lucidly.
“Since the financial crisis, we have made UK banks and building societies increase the financial resources (capital) they have set aside to act as a shock absorber for bad times. To help them keep lending during the pandemic we are letting them use the resources they have set aside.”
Or this one
"We are also supporting the UK economy through £300 billion of quantitative easing. This mainly involves us buying large quantities of government bonds. When we do this, the interest rates on those bonds go down. This helps to keep the interest rates on mortgages and business loans low."
RBI’s monetary policy reports in recent times are a significant improvement over what they used to be till a few years back. But they still have plenty of room to simplify matters for the lay person.
CNBCTV18.com takes a stab at stripping the latest RBI policy document of some of its jargon and conveying the central bank’s message to you: the statement in bold being from the policy document while the bit in italics being our (hopefully, dejargonised enough) interpretation.
Global economic activity has remained fragile and in retrenchment in the first half of 2020
Global economic activity declined in in the first half of 2020
Global financial markets, however, have been buoyant, with the return of risk-off sentiment inserting a disconnect from the underlying state of the real economy.
Stock markets across the world are rising even as the real economy is in shambles. Investors are willing to take risks, overlooking the problems at the ground level.
In most EMEs, however, CPI inflation, after easing in April-May, rose in June amidst cost-push pressures.
In most emerging economies, consumer inflation is climbing again as companies are passing on increased costs of production to consumers
Consequently, several high-frequency indicators have levelled off.
Several high-frequency indicators — or data points that are released on a regular basis (steel, cement, vehicles, airline ticket sales etc) - through which one can closely track economic activity have become flat.
Households’ one year ahead inflation expectations were lower than their three months ahead expectations in the July 2020 round of the Reserve Bank’s survey, indicating their anticipation of lower inflation over the longer horizon.
Households expect inflation to be high over the next three months, but not as high over the next one year, according to the RBI Survey.
Producers’ sentiments on input prices remained muted as their salary outgoes (sic) fell.
(This one beats us….A possible explanation could be that manufacturers are not so worried about raw material costs as they are saving costs elsewhere, notably on wage bills)
A more favourable food inflation outlook may emerge as the bumper rabi harvest eases prices of cereals, especially if open market sales and public distribution offtake are expanded on the back of significantly higher procurement
Food inflation may ease because of the bumper rabi harvest, which will bring down prices of cereals. More so, if the government increases the sale of food from its warehouses to wholesalers and through ration shops.
Nonetheless, upside risks to food prices remain.
Yet, food prices may rise
The abatement of price pressure in key vegetables is delayed and remains contingent upon normalisation of supplies.
Prices of key vegetables are not falling, and they may remain high till supplies are back to normal
Protein-based food items could also emerge as a pressure point.
Pulses, meat, fish and eggs could remain costly.
Higher domestic taxes on petroleum products have resulted in elevated domestic pump prices and will impart broad-based cost push pressures going forward.
High taxes on diesel and petrol have made fuel costly, and this will push up prices of goods and services across the board.
Taking into consideration all these factors, the MPC expects headline inflation to remain elevated in Q2:2020-21, but likely to ease in H2:2020-21, aided by favourable base effects.
Inflation may stay high in this quarter, but could ease in the period between October 2020 and March 2021. It would also help that the inflation number for the second half will be compared with the figure from the same period last year, when inflation was high.
Taking into consideration the above factors, real GDP growth in the first half of the year is estimated to remain in the contraction zone.
All things considered, the total economic output -- or the value of all goods and services made or rendered during a period -- will fall in the first half of the year.
For the year 2020-21 as a whole, real GDP growth is also estimated to be negative.
For the full year too, the economy may contract.
An early containment of the COVID-19 pandemic may impart an upside to the outlook.
If COVID-19 is contained soon, things could look up.
A more protracted spread of the pandemic, deviations from the forecast of a normal monsoon and global financial market volatility are the key downside risks.
Events that could worsen our view on the economy include: If COVID cases continue to rise, monsoon turns out to be worse (or too much) compared to estimates, or if global financial markets start swinging wildly.
The MPC noted that in an environment of unprecedented stress, supporting recovery of the economy assumes primacy in the conduct of monetary policy.
Given the unprecedented stress in the economy, the monetary policy’s primary goal right now is to help revive it.
While space for further monetary policy action is available, it is important to use it judiciously to maximise the beneficial effects for underlying economic activity.
There is room to reduce interest rates, but we need to use it judiciously so that there are benefits to the economy by doing so.
The headline inflation prints of April-May 2020 are obscured by (a) the spike in food prices and (b) cost-push pressures.
Overall inflation—which is the sum of individual components—was high in April and May because of costly food prices as well as companies passing on higher costs to consumers.
Given the uncertainty surrounding the inflation outlook and extremely weak state of the economy in the midst of an unprecedented shock from the ongoing pandemic, the MPC decided to keep the policy rate on hold, while remaining watchful for a durable reduction in inflation to use available space to support the revival of the economy.
Even as the economy is very weak, we would like to wait for inflation to decline sustainably before we cut interest rates again.
First Published: IST