Can the RBI save the Economy? - The Daily Reckoning
The Daily Reckoning by Bill Bonner
On This Day - 23 November 2013
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Can the RBI save the Economy? A  A  A

- By Asad Dossani, Author, The Lucrative Derivative Report

Asad Dossani
The Reserve Bank of India (RBI) has a crucial role in managing the Indian economy. It is responsible for monetary policy (i.e. setting interest rates) and it regulates much of the financial sector. Since the new governor Raghuram Rajan has taken over, the RBI has been active in trying to revive the economy.

The steps it has taken include raising interest rates to combat inflation, and introducing various liberalization measures in the financial sector. The most recent measure is to increase the foreign bank presence in the country, thereby opening up the sector to greater competition.

While some of these measures are unpopular, it is refreshing to see that the RBI is doing what it believes is correct, rather than pandering to political pressure. It can do this because the RBI is independent of the political process. The RBI governor is not an elected official, he is appointed instead.

The independence of the RBI makes it much stronger and effective than it would be otherwise. The RBI is staffed with professional economists, whose sole focus is to design the best policies for the Indian economy. They are able to implement policies that may be unpopular in the short term, but will have long term benefits for the country.

In contrast, the government is staffed primarily by politicians, whole sole focus is to get reelected. When it comes to fiscal policy, the government has a difficult time pushing through economic reforms due to political pressures. This situation is not unique to India. In the US, the Federal Reserve can effectively implement policy, while the US government cannot even pass budgets on time, let alone enact policy to improve the economy.

Though the RBI is effective in implementing policy, it cannot on its own save the Indian economy. It can certainly make things better, but there is a large scope of policy that belongs to the government that the RBI cannot do anything about. For example, improving infrastructure and reducing corruption are two important economic issues that only the government can fix, not the RBI. Thus, while the RBI can make the economy better, we need the government to step up in order to allow the economy to reach its full potential.

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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 "Can the RBI save the Economy?"

Commodore Suresh Bhandoola, Indian Navy

Dec 2, 2013

Corruption is not a disease but an epidemic. Right from the vada pav wala on the street corner to the highest rulers of the land, are involved. So what is the answer? Perhaps a dose of military rule ?? Too drastic ?? But then an endemic condition needs a drastic cure.

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Valerian Menezes

Nov 24, 2013

The actual price control does not depend alone on the monetary policy of RBI. Many a time it depends on demand and supply. The demand always expands. But supply depends on so many factors including climatic conditions. With every thing being favourable there is tendency of the wholesaler to hoard. In the absence of stringent laws against hoarders and black marketeers frequent price rise is experienced in the economy. The government with a political will only can control this.

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ajay k gupta

Nov 24, 2013

If one has no policy to offer what to do, specially they know the end?

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Borkar M.R.

Nov 24, 2013

What can RBI do alone? P 4 Chairs, B 4 Grabs, Janata for sufferings! One RBI n Thousand Thugs n Crore Pendharis! It is only the Saints Good Deeds in the past, this country is surviving. So many economists running the Govt and Administration still this is what we get. We cannot even cry.- Borkar

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Borkar M.R.

Nov 24, 2013

What can RBI do alone? P 4 Chairs, B 4 Grabs, Janata for sufferings! One RBI n Thousand Thugs n Crore Pendharis! It is only the Saints Good Deeds in the past, this country is surviving. So many economists running the Govt and Administration still this is what we get. We cannot even cry.- Borkar

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Raghava Neti

Nov 24, 2013

Corruption is everywhere, though I don't support it personally. Malaysia and China, for example, bothe have it; but they are developed/ fast developing. What we need is institutional accountability, which is lacking in India.

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