Saturday, December 21, 2013

RBI is Toying with Peoples' Lives

Last Wednesday the Indian central bank RBI, according to media language, surprised the markets by keeping its policy rates unchanged despite growing inflationary pressure in the Indian economy. Both WPI (Wholesale Price Index) and CPI (Consumer Price Index) are rising again; RBI's tone was also mostly anti-inflationary before the policy announcement, but they still kept the rates unchanged.

As I am saying since quite long time, to see the impact of RBI's policies on the economy, we should not focus on what RBI is saying, but what they are actually doing; We must focus on their actions. On one side when they are talking about taking a tough stance against inflation, they actually continue to inflate! Raghuram Rajan is trying to manage the inflation expectations while at the same time creating more inflation. This happens because his mainstream economic theory defines inflation as a persistent increase in the general price level. Rise in price is not inflation, but an effect of inflation, as I have said many times in the past. Increase in the supply of money and credit is inflation. By keeping the rates on hold, Rajan continues to inflate the money supply. And this inflation continues to erode the purchasing power of rupee, which gets reflected into the higher prices of various economic goods like food or energy items.

His post policy conference talk with the media also shows how he is toying with citizens' lives. He is trying to play god by trying to "calibrate" the monetary policy to micromanage the inflation rate. Here's what he said:
Thank you. Let me start with a short statement. Good Morning. Recent readings suggest that headline inflation, both retail and wholesale have increased, mainly but not exclusively on account of food prices. While core CPI and core Wholesale Price Index (WPI), that is, inflation excluding food and fuel have been stable, despite a steady and necessary increase in government administered prices towards market levels, the high level of core CPI inflation leaves no room for complacency. There is, however, reason to wait before determining the course of monetary policy. There are indications that vegetable prices may be turning down sharply, although intermediaries could impede the full pass-through into lower retail inflation. Our own current readings from the metros suggest a significant fall in vegetable prices, both at the wholesale and retail level which gives us reason to make this statement. In addition, the disinflationary impact of recent exchange rate stability should play out into prices. Finally, the negative output gap, including the recent observed slowdown in services growth, as well as the lagged effects of effective monetary tightening since July, should help contain inflation.

This policy decision, which is to stay on hold, is a close one. Current inflation is too high and I repeat, is too high. However, there are wide bands of uncertainties surrounding the short term path of inflation from its high current levels. Given the weak state of the economy, the inadvisability of overly reactive policy action, as well as the long lags with which monetary policy works, there is merit to wait for more data so that uncertainty can be reduced before we act.

There are obvious risks to waiting for more data including the possibility that tapering of quantitative easing by the US Fed may disrupt external markets and that the Reserve Bank may be perceived to be soft on inflation. Let me assure you that the Reserve Bank will be vigilant. Even though the Reserve Bank has maintained status quo today, it can help guide market expectations through a clearer description of its policy reaction function which is: if the expected softening of food inflation does not materialise and translate into a significant reduction in headline inflation in the next round of data releases, or if inflation excluding food and fuel does not fall, note that there is an “or” here, which means both conditions have to be met, the Reserve Bank will act including on off policy dates if warranted, so that inflation expectations stabilise and an environment conducive to sustainable growth takes hold. The Reserve Bank’s policy action on those dates will be appropriately calibrated.
This is all impossible. One man sitting in RBI office can never really determine the market rate of interest, inflation rate, rupee exchange rate or any other such market price. Price determination can take place only in the free market. Only the free market forces of demand and supply can truly determine any exchange ratio i.e., price. Rajan thinks that the Indian economy is some kind of a mechanical machine, which he can easily "fine tune"!  He doesn't understand that an economy is no machine, and his fine tuning is hurting billions of people around the country. His micromanagement of the economy and calibration of monetary policy is creating inflation, boom-bust cycles, unemployment, income inequality etc., etc., economic, social and political problems. The more he will try to calibrate this machine, the more he will screw peoples' lives. Central planning social engineering will always result into disaster. RBI is a central planning monetary authority, and it is wrecking our economy.

Raghuram Rajan and other RBI governors can talk and act so irresponsibly like this because they are not going to be punished for their crime of destroying millions of peoples' lives via their inflationary monetary policy. They will face no justice; they will never be convicted; they will never face any jail time. In fact, after leaving their governor positions, they will be given highest accolades by the state officials; they will get lucrative jobs from statist institutions; they will be given honorary degrees from universities; they will become future Bharat Ratnas and what not. This is all disgusting. If these governors are held accountable for their actions, then, I am sure, none of them will dare to join RBI. But, I know no such thing is going to happen. Ultimately it is the public opinion that will decide the fate of RBI. Ultimately it is the free market forces which will end the money monopoly of central banks around the world. When people will understand the true evil nature of central banks, they will demand its demise. As long as people are unaware of central banking institution's true nature, we will have to suffer at the hands of social engineers like Raghuram Rajan.    

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