First it was China whose affair with "tapering" was short and sweet, and after the banking system nearly chocked in June on the PBOC's telegraphed tightening, the central bank has once again released the spigots with reverse repos galore. Then overnight, fighting a collapsing market, it was India's turn to "flip-flop" on its recent tightening drives, when in an attempt to stop the Rupee's implosion, the central bank announced it would purchase $1.2 billion in long-term bonds, along with other measures, in its first QE-like foray to stabilize markets and more importantly the currency (yes, in India QE is supposed, at least for now, to lead to a strong currency). And while it did manage to prevent another rout to the bond and stock markets, with the 10 Year bond yield falling below 9% and the Bombay Stock exchange bank index jumping more than 5%, the currency initially pushed higher only to tumble to a fresh record low of 64.59 as foreign investors continue to pull out capital.
Such concerns will not be ameliorated by what is now seen as outright confusion by the RBI which is tightening one day, easing the next, and generally unsure what it wants to focus on: inflation, rates, equities, a functioning banking sector or last but not least, the currency.
Alas, it appears that unlike in the US, the central bank can not have its tightening cake (as it is already fighting runaway inflation) and inject liquidity at the same time.
In a statement the RBI explained its new measures, saying: “It is important to address the risks to macroeconomic stability . . . At the same time, it is also important to ensure that the liquidity tightening does not harden longer term yields sharply and adversely impact the flow of credit to the productive sectors of the economy.”
The investing public was certainly not impressed:
However, the latest move followed a series of other minor interventions, including steps to tighten controls on domestic capital controls last week and further open market interventions to support the rupee on Tuesday, leading to doubts about the RBI’s overall approach.
“Over in India, flip-flops by policy makers continue,” Rajeev Malik, senior Asia-Pacific economist at brokerage CLSA, wrote in a note. “The latest moves by the RBI are aimed at cleaning up the unintended mess in the bond market from their convoluted and ineffective currency defence. But they still appear unsure of what [growth, rupee, bonds] they want to eventually save.”
Other analysts said the measures were likely to be at least partially successful in the RBI’s attempt to correct the unintended consequences of previous tightening measures.
“They have been trying to walk a careful balance, with measures aiming to stabilise the currency, but they never really intended it to spill over to long-term yields, which have been shooting up,” says Leif Eskesen, chief economist for India at HSBC
“And so they are now trying to ensure that they don’t do anything to hurt growth and curb credit growth . . . and this should to some extent help to contain yields, although there is still a difficult backdrop.”
Suddenly the world is learning that Bernanke's one-size-fits-all response to every monetary (and fiscal) crisis may not be just what the doctor ordered, especially for those nations which do not have a reserve currency privilege. Which, of course, should Bernanke and his successor continue on the same path, will be a privilege that will soon be taken away from the US as well.
As for India, the following chart also from the FT, should put things in perspective: