The Fed versus the RBI

Jan 28, 2012

- By Asad Dossani, Author, The Lucrative Derivative Report

Asad Dossani
The central banks of the world's largest economy and the world's largest democracy could not be more at odds in their approach to dealing with economic problems. Just recently, the Fed announced that extremely low rates would remain in place until the end of 2014, in order to strengthen economic recovery in US.

Throughout the last few years, the Fed has maintained an extremely loose monetary policy. This includes lowering interest rates to near zero, two rounds of quantitative easing, yield curve operations, and the promise of further easing to come. This type of behavior is unprecedented for the US economy, as interest rates have never been so low for such a long period of time.

The Reserve Bank of India (RBI) has maintained an extremely tight monetary policy over the last two years. Interest rates have steadily risen in order to combat inflation, and only recently have rates stopped going up. The most recent inflation data has been lower than the past, but still remains at levels that are too high.

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One consequence of the tight monetary policy has been slowing growth rates. The RBI has recently indicated its concern over growth, and may reverse its tight monetary policy in the future. Nonetheless, their focus is and remains inflation first, and growth second.

On the one hand, we have the Fed, whose policies are primarily driven by growth and employment figures, at the expense of inflation. On the other hand, we have the RBI, whose policies are primarily driven by inflation, at the expense of growth. So which approach is the best?

The answer depends on which sector of the economy we are concerned with. In a tight monetary policy environment with high interest rates, business investment suffers, and consumer access to credit suffers. On the other hand, savers benefit due to high interest rates, and most of the population benefits due to lower inflation.

In contrast, a loose monetary policy has the opposite effects. Businesses benefit as they can borrow more cheaply and debtors benefit as they pay lower rates. Savers suffer due to receiving low interest rates, and those on fixed incomes suffer from higher inflation.

If we are looking at the economy as a whole, things once again depend on what is more important. Is it better to have higher growth at the expense of higher inflation, or is it better to have lower inflation at the expense of lower growth? Both the RBI and the Fed have differing views on this last question, and this forms the basis of their policies.

In general, having a balance is a good thing. Both the Fed and the RBI have monetary policy stances that are too extreme. A balanced monetary policy should place importance on both growth and inflation, as both statistics are vital to the well functioning of any economy.

is a financial analyst and columnist. He actively trades his own and others' funds, investing primarily in currency, commodity, and stock index derivative products. Prior to this, he worked at Deutsche Bank as an analyst in the FX derivatives team. He is a graduate of the London School of Economics. Asad is a keen observer of macroeconomic trends and their effects on global financial markets. He is deeply passionate about educating investors, and encouraging individuals to take part in and profit from financial markets. To put it colloquially, he wishes to take Wall Street products and turn them into Main Street profits!

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6 Responses to "The Fed versus the RBI"


Jan 31, 2012



Nikhil H Shah

Jan 30, 2012

Inflation has not been a serious concern at this time for the US and hence the Fed has a luxury to have loose monetary policy.

India and the US are fighting two different situations and therefore is NOT an APT comparison. The article is a waste of time.

Nikhil H Shah


Suriyanarayanan Ramji

Jan 30, 2012

The basic necessity of a human being is Roti,Kapada and Makkan.The inflation of the food articles
prices needs to be controlled as lower income and middle income earners have to allocate major portion of their income for food and there by reducing their savings capacity.
In USA many live on credit cards and the savings rate is low.Hence RBI action in bringing the inflation down
is essential to Indian economy and common people.



Jan 29, 2012

India is different from united States. RBI is right in following higher interest regime. Indian
Corporates have lot of cash and they are not investing or expanding their entities. Perhaps
This is due to the Indian Govt's failure to liberalize sufficiently and necessary attention
for infrastructureb improvement specially Electricity, roads etc. The Govt s should do its
Part. RBI has done it's part. It is now squarely on the Govt.


Jimmy Spencer

Jan 29, 2012

Appreciate your point of view but let us accept that do what we may economics cannot be delinked from politics whether it is India or the USA.In view of the State elections in five states the focus had to be to lower inflation since the general public is not interested in growth numbers but what they pay for thier day to day living and therefore containing inflation is of prime importance.In the USA the situation is exactly the opposite with Unemployment being extremely important in a make or break situation and therefore easing the monetary policy ensures higher growth,lower unemployement,higher retail sales and better lifestyle resulting in a relatively happy frame of mind for the individuals and less headache for the policy makers.


Shekhar Suresh

Jan 29, 2012

I think it is the respective ground reality which determines the varying approaches of both these reserve banks.The US has a pressing need to kick start the sagging economy.India needs to bring the inflation under control. Obviously their approaches need to be different. In both cases the Reserve banks are hampered with inefficient and ineffective fiscal approaches by the Governments.


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