What do the RBI and the Fed have in Common? - The Daily Reckoning
The Daily Reckoning by Bill Bonner
On This Day - 15 September 2012
PRINTER FRIENDLY | ARCHIVES
What do the RBI and the Fed have in Common? A  A  A


- By Asad Dossani, Author, The Lucrative Derivative Report


Asad Dossani
The trivial answer here is that both the Reserve Bank of India (RBI) and the US Federal Reserve (Fed) are central banks. But there is much more to it. This week, the Fed announced a new round of asset purchases, or as its known more commonly, QE3.

In the past weeks, the Fed had given indications that they may go down this route of further QE. So it is not a huge surprise that has occurred. The scale of the new round of QE is larger than what many had anticipated, and as a result markets have reacted quite strongly to the announcement.

--------------------------------- Big returns from small caps (Ending today!) ---------------------------------

The opportunity to sign up for our Hidden Treasure service, at a HUGE discount, is ending today.

After today, the price will go back to the usual Rs 5,000 per year. And you also won't get the 2 special reports anymore.

We've got a 30-day full refund guarantee on this, so you have nothing to worry about.

Just sign up and check out Hidden Treasure before the offer closes... Click here for full details...

----------------------------------------------------------------------------------------------------------------


Let's go back to our initial question; what do the RBI and the Fed have in common? At first glance, they appear to be at complete opposite ends of the monetary policy spectrum. The Fed aggressively pursues expansionary monetary policy to jumpstart the US economy, despite the risk of higher inflation.

The RBI behaves in the opposite way. Despite falling growth rates in India, the RBI has kept interest rates high in order to bring down inflation. Each approach has its benefits and drawbacks, but is certainly clear that the RBI and the Fed have very different approaches to managing the economy.

But there is one striking similarity between them. When the Fed announced QE3 this week, they mentioned that the US economy was in danger due to a fiscal cliff at the end of this year. Unless US lawmakers reach a deal on the budget, significant tax increases and spending cuts will automatically take place, likely dragging the US back into recession. The gridlock in the US political system means that this is a likely outcome.

And so, the Fed has taken the step to pursue aggressive monetary policy to make up for the fact that fiscal policy is going to push the economy in reverse. And the fiscal policy gridlock is all due to political factors. Perhaps now this sounds familiar.

The RBI has repeatedly mentioned that the government is doing little to help inflation and help the Indian economy. And this is largely due to policy paralysis and inability of political parties to reach agreement. Thus, the RBI's policies are in part trying to compensate for the fact that the central government is not likely to achieve anything substantial.

What the Fed and the RBI have in common is that both are operating in environments whereby fiscal policy is harming the economy. And unfortunately, no amount of central bank action can make up for policy paralysis in the fiscal sphere.

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!

Disclaimer:
The views mentioned above are of the author only. Data and charts, if used, in the article have been sourced from available information and have not been authenticated by any statutory authority. The author and Equitymaster do not claim it to be accurate nor accept any responsibility for the same. The views constitute only the opinions and do not constitute any guidelines or recommendation on any course of action to be followed by the reader. Please read the detailed Terms of Use of the web site.

Get The Daily Reckoning directly
in your mail box.
Just enter your e-mail address » 

Read our Privacy Policy and Terms Of Use.

Equitymaster requests your view! Post a comment on "What do the RBI and the Fed have in Common?". Click here!

3 Responses to "What do the RBI and the Fed have in Common?"

Hasit Hemani

Sep 17, 2012

At both the places there are some real donkeys at work. At both the places they take policy decisions that sometimes actually messes up the the things rather than solves it. At both the places the blockheads think that they are running the show but they do not know that economy is a self regulating adjusting complex manifestation which takes into stride even wrong policy decisions. Like our body it requires food and discipline to keep it healthy. But when we indulge ourselves and have a go we suffer and get sick. But somehow it again re-surges automatically. So economy should not be interfered too much.

Like 

B S MURTHY

Sep 16, 2012

Any country should have a stable economic policy. Frequent changes in the policies and laws by the politicians and / or Central Bank would naturally affect the planning of corporate world. We have 5 year Plan system. But 5 year plan guide lines get deviated every year during budget. If we maintain a stable interest rate structure, government can easily stabilise the price structure of end products and thus bring the stability to the economy with a consistent growth rate.
In India because of the present political out look under the guise of 'globalisation' we have permitted FIIs into Indian stock exchanges which has been de-stabilising our economy. All our planning is going to waste basket with the vagaries of FIIs in acquiring control over our corporate world. Let the Government wake up at least now and send out FIIs as INDIRA GANDHI did once during her regime.

Like 

Umesh Sharma

Sep 16, 2012

The problem India faces is the Governments inability to give the country good governance in return for the taxes and levies it collects.If there is a sincere attempt to maximize the benefits to the nation by proper utilization of resources instead of frittering them on political gimmicks like subsidies reservation quotas and development plans which have a very low yield.If the Government minds its business with due sincerity there is little required of RBI to control inflation by tight monetary policy or otherwise


Like (1)
  
Equitymaster requests your view! Post a comment on "What do the RBI and the Fed have in Common?". Click here!

Recent Articles:
Deep State First
August 23, 2017
Nowhere was the darkness deeper than in the nation's capital. There, no light shone. No flicker of awareness...observation...learning...or reflection appeared.
A Darkness Is Spreading Across the US
August 22, 2017
Today, we are attacked by one preposterous thing after another, each of them even more absurd than the last.
Dear PM Modi, India is Already Land of Self-Employed, and It Ain't Working
August 21, 2017
Most Indians who cannot find jobs, look at becoming self-employed.
Trump Takes a Beating
August 18, 2017
Donald J Trump, a wrasslin' fan, took a 'Holy Sh*t!' blow on Tuesday.