Monetary policy: Is the status quo justified?

The RBI decided to maintain the policy rate at 6.5 per cent in its Monetary Policy Statement of August 2024.

The growth forecast for FY 24-25 remains 7.2 per cent. The inflation forecast remains 4.5 per cent. What is the case for cutting the policy rate and for not cutting the rate?

i. The case for cutting the policy rate

• With inflation projected at 4.5 per cent, the real rate is 2 per cent. This is too high. A real rate of 1.0 per cent is the "neutral rate", that is, where inflation is stable and growth is maximised. So, there is adequate scope for cutting the policy rate. The problem is that the RBI's estimate of the neutral rate has changed. In FY 22, the neutral rate was estimated at 08-1 per cent. More recently, it estimates the neutral rate at 1.4-1.9 per cent. If you accept the upper end as the estimate, the present neutral rate of 2 per cent seems okay

ii. The case against cutting the policy rate:

• The neutral rate argument apart, the RBI governor has said repeatedly that the RBI wishes to move the inflation rate down to 4 per cent. Food inflation remains elevated. Cutting the policy rate at this point would thus not serve the objective of meeting the inflation target of 4 per cent.
• India's growth rate of 7.2 per cent is pretty impressive in what is the bleakest world economic environment in the past two decades. Even if growth falls to 7 per cent, that would be good enough. It is incorrect to suppose that cutting the policy rate can enhance the growth rate. Why risk higher inflation when the growth rate does not have much chance of accelerating?
• The rupee is pushing close to Rs 84 to the dollar. A cut in the rate would make it difficult for the RBI to contain the rupee below Rs 84, beyond which it does not wish to see the rupee depreciate. The stance could change if the Fed and European banks cut their rates down the road. But a rate cut at this point would be imprudent in relation to maintain stability in the rupee exchange rate.

I would add one more point to the case against cutting the policy rate: geopolitical tensions. There has been an escalation in the situation in both Ukraine and Gaza. Neither conflict has thus far affected the global economy significantly. But we don't quite know when "managed escalation"- the game that NATO and Russia and Israel and Iran and its proxies have been playing- will get out of hand. 

As I write, Israel is bracing for a massive retalisation from Iran and its Lebanese ally, Hezbollah. If a regional war breaks out, oil prices could shoot up and render all macroeconomic estimates meaningless. Better to err on the side of caution in these troubled times- especially when gdp growth is over 7 per cent.

Should central banks prioritise inflation or growth this year? No easy answers

Central banks in advanced economics cannot make up their minds whether they should priortise growth over inflation in the months to come. That is because it's hard to predict how the Ukraine conflict will shape. 

At the moment, they have prioritised inflation. But if the conflict worsens, growth will be the bigger problem. My column in BS today, Central banks haven't got it wrong.

FINGER ON THE PULSE

Central banks haven’t got it wrong

TT RAM MOHAN

Central banks in advanced economies are today in thrall to the conflict in Ukraine. Emerging market central banks, in turn, are in thrall to the actions taken by the US Federal Reserve. Those who fault  central banks for their response to inflation in recent months seem to gloss over these facts.

During the global financial crisis of 2007, central banks knew what they had to do- loosen monetary policy and keep doing so. Likewise, during the pandemic. Now, the course is nowhere as clear.

The conflict in Ukraine has rendered the conduct of monetary policy extremely difficult. There is still no knowing how the conflict will pan out. Western sanctions against Russia are unprecedented in their scope and severity. And it’s hard to say how Russia will respond as the conflict rages on. 

The US Federal Reserve faces an unenviable task.   With the inflation rate in the US at 9.1 per cent in June, analysts warned  that a recession was imminent.  Some claim that the US is already in recession. This would imply that the Fed should go slow on rate hikes to fight inflation.

Hold on. After the last meeting of the Federal Open Markets Committee, Fed  Jerome Powell poured cold water on talk of a recession. US unemployment rate in July was 3.5 per cent, which was the level before the pandemic set in. This meant that the Fed should tighten more aggressively, not less so, as the recession school contended.

If that is not confusing enough, the conflict in Ukraine is a huge imponderable. Do we know whether or not the impact of Ukraine on the world economy is played out? If central banks reckon that the oil price will stay in the range of $100-110, they would be justified in concluding that inflation is the bigger threat at the moment. However, if Russia moves to cut supplies drastically, all bets on oil prices are off and growth is seriously threatened.  

JP Morgan Chase has warned that, in an extreme scenario, Russia could slash dramatically oil supplies in response to the oil price cap imposed by the West. Oil prices could then surge to $380 dollar a barrel. At that price, global growth will collapse and inflation will cease to be the priority for central banks.

So great is the uncertainty created by Ukraine that, after the last meet, Mr Powell refrained from providing forward guidance, that is, any indication of exactly what rate hikes to expect in the coming months. Nor is the Fed in a hurry to return to the inflation target of 2 per cent for the US. It seems quite happy to return to the target by end 2023.

If the task for the Fed is so complicated, the challenge for central banks in emerging markets, including the RBI, can well be imagined. In addition to factoring in the outlook for growth and inflation, they have to keep a wary eye on the exchange rate. Coping with the “spillovers” of Fed policy is testing the mettle of emerging market central banks.

That should explain the stance taken by the Monetary Policy Committee (MPC) of RBI earlier this month. The MPC made no change to its forecasts for growth and inflation in 2022-23. Nevertheless, it thought fit to increase the policy rate by 50 basis points. The MPC argued that the increase was needed to anchor inflation expectations and to bring the inflation rate closer to the target of 4 per cent.  

That does not sound very convincing. With the actions taken so far, the RBI can at best hope to bring the inflation rate down to the target only by end 2023, exactly as the Fed intends to. The RBI, like the Fed, has chosen not to provide forward guidance.

The more plausible explanation is that the RBI is keen to manage the exchange rate of the rupee after the Fed’s rate hike of 75 basis points. The real effective exchange rate of the rupee against a basket of currencies has been steady over the past year. Analysts have argued that we could do with a depreciation in the real effective exchange rate in order to boost exports.

However, when it comes to managing capital flows, it is the exchange rate with respect to the dollar that matters. The dollar is the safe haven for funds. In order to stem the outflow of capital, it is important that the rupee not depreciate too much with respect to the dollar. If portfolio investors sense a steep depreciation with respect to the dollar, they will flee the rupee. The RBI’s policy rate moves are thus substantially dictated by the Fed’s own.  One wonders whether the RBI would have thought it necessary to raise the repo rate if the Fed itself had settled for a more modest increase.

On a broader note, critics of central banks say that central banks failed to catch the impetus to inflation post the pandemic. Many believe central banks have laid the ground for stagflation similar to the one witnessed post the oil shocks of 1973 and 1979. As the annual economic report of the Bank for International Settlements (June 2022) makes clear, the critics are off the mark.  The behaviour of commodity prices this time has been different from that in the 1970s. So are the economic backdrop and monetary policy regimes.

First, the oil price shock has been less severe this time around. Oil price have increased by 50 per cent since mid-2021 and are around their long-term averages. In 1973, oil prices doubled in a month and touched historic highs. Secondly, higher energy prices impact growth to a less extent today because of the reduced energy-intensity of GDP. Thirdly, the 1973 rise in prices happened on the back of several years of rising inflation. In contrast, today’s episode follows years of low inflation. Lastly, the institutional frameworks for monetary policy and for anchoring inflation expectations are far more robust today.

Forecasts of economic doom in the year ahead are premature and central bank-bashing is misplaced. Central banks are not behind the curve on inflation nor is a soft landing inconceivable  in the US. To be sure, things could change dramatically if the conflict in Ukraine worsens. But that is hardly something central banks can prepare for.

(ttrammohan28@gmail.com)

 

 

Scepticism about inflation targeting: Edward Chancellor

Inflation targeting has become the norm in many countries, including India. Edward Chancellor, journalist, historian and author, sounds a sceptical note in this article. He has provided a more elaborate critique in a book, The Price of Time.

Chancellor says that inflation targeting has allowed central banks to set ultra-low interest rates in response to bouts of deflation and to justify the same by citing the inflation target given to them. As long as inflation stays below target, the interest rate set by a central bank is okay.

Chancellor thinks that is not okay. There are a number of malign effects of ultra-low rates that must be taken into account:

Yet these targets produced a number of corruptions and distortions. Ultra-low interest rates pushed the US stock market to near record valuations and provided the impetus for the “everything bubble” in a wide variety of assets ranging from cryptocurrencies to vintage cars. Forced to “chase yield”, investors assumed more risk. The fall in long-term rates hurt savings and triggered a massive increase in pension deficits. Easy money kept zombie businesses afloat and swamped Silicon Valley with blind capital. Companies and governments availed themselves of cheap credit to take on more debt.

Central banks must, therefore, be guided not just by the level of inflation but also by its effects of interest rates on asset valuation, financial stability, leverage and investment. In other words, we are back to multiple objectives for central banks instead of a single objective, namely, inflation! 

This may sound plausible. Except that, elsewhere, Chancellor argues that the alternative to ultra-low interest rates is simply to not respond to bouts of depression because they tend to cleanse the economy of unproductive or inefficient firms. That is more than a little extreme. The idea that governments should have stood by when the pandemic erupted is hard to swallow. You must read Martin Wolf's critique of Chancellor's  book to get the complete picture. It is all very well to ask central banks to take asset bubbles into account but we know that that is a notoriously difficult task. When is an increase in asset values a bubble? We do not have a clear answer. 

At the same time, as Wolf points out, it is important to take on board Chancellor's plea to factor financial stability into central bank policy. The interest rate is a useful tool for battling recession. At the same time, central banks must address threats to financial stability through various instruments of regulation. Excessive leverage is an issue both in the financial sector and in the corporate world. Wolf says that removing tax deductibility for debt must be part of the solution. The solution has been urged by many. The time may have come to consider it seriously.

Storm over Trump nominee for Fed Governor, Judy Shelton

Shelton the charlatan, wrote economist Bradford de Long. Shel-no, commented the Economist. This is no way to run a central bank, pontificated the New York Times.

When the establishment gangs up against somebody as solidly as it has done in the case of Judy Shelton, one of two individuals nominated for Fed Governor by President Trump, you begin to suspect there must be something faintly right about her.

Shelton is not an economist. She has a doctorate in business administration. She was appointed Executive Director to the EBRD by President Trump. She was written extensively on economic matters- and quite well, I might add.

What do Shelton's critics have against her? They say she has in the past favoured a return to the gold standard- this makes her seem archaic. They argue that she has changed her views on the Fed's policies several times. She was against monetary loosening a few years ago. Today she favours loosening. She was opposed to the Fed supporting stock prices a few years ago. Now she wants the Fed to do just that.

Well, it's been pointed out that Ben Bernanke himself has spoken favourably about the gold standard at one point. Policy prescriptions can change as economic conditions change. It's not clear that these are sufficiently strong arguments against a nominee for the Fed.

No, the reason that many in the establishment are up in arms against Shelton is that she has challenged a key tenet of the establishment, namely, central bank independence. Shelton has said:

How can a dozen, slightly less than a dozen, people meeting eight times a year, decide what the cost of capital should be versus some kind of organically, market supply determined rate?. We might as well resurrect Gosplan ( the agency of the Soviet government that ran its economy.). 

You can see what gets the goat of the technocratic elite that runs our financial system.

Central bank independence, at the very least, means that monetary policy is set by technocrats insulated from political interference. The idea is that politicians are driven by short-term considerations, such as winning elections, whereas technocrats can afford to take the long view.

Well, maybe, maybe not. Technocrats do have political leanings and loyalties and may want to tailor monetary policy to favour a particular party at election time. Leaving aside voting preferences, central bankers do have views that are politically important. They may favour low interest rates and how stock prices because they have had links with financial firms (or want to hop on to cushy posts in financial firms after they retire). There is nothing apolitical about decisions on money supply.

Money is a public good. And banks, because they enjoy the public safety net, have a public dimension to themselves. The supply of money and the stability of banking are matters that involve the larger public good. Is there any reason why these matters should not be subject to political direction when most other matters in the public realm are? In other words, has the time not come to democratize central banking especially when the track record of central bankers before and after the global financial crisis has not exactly been exemplary?

Many are asking these questions. Shelton's problem is that she asks these questions and wants to get on to the board of Fed.

Compelling case for the RBI to cut its policy rate

I argue in the Hindu today that the case for a rate cut is quite compelling. It's not just that CPI inflation is below the RBI target of 4%. The strengthening rupee and strong capital inflows address a concern RBI would have had even a few months ago: lowering the gap between Indian and dollar yields would cause an exodus of funds and destabilise the rupee. We don't have to worry that much about the Fed stance at the moment.

A rate cut will not just boost growth, it will help the bottom lines of banks and that of corporates- it would help address the "twin balance" sheet problem. The problem, as I see it, is that the RBI committed itself to a 4 per cent inflation target when the government gave it a flexible band of 4 plus or minus 2 per cent. Now, that's called being overzealous.

By the way, Surjit  Bhalla flays the MPC today for getting its inflation forecasts hopelessly wrong:

At its first demonetisation meeting on December 7, the MPC concluded that demonetisation was temporary and so, it should look through its effects on dampening inflation and growth. It expected inflation and GDP growth to hustle up in a “V-shaped” pattern. The reality — GDP growth has been flat at 7 per cent, inflation has followed just the first half of the V. The MPC’s post-demonetisation short-term three-month forward forecast for March 2017 was 5 per cent with an upside bias. Actual March 2017 CPI inflation — a low 3.5 per cent! Actual April CPI inflation — 3 per cent. I have searched far and wide but not found any central bank, or even an amateur economist, with such a large forecast error for a three-month projection. These forecast errors are liable to get worse.

He also points out that the RBI has moved deftly from targeting headline inflation to what he calls a "false" measure of inflation:

First, the MPC broadly hinted that it was going against its own mandate of targeting headline inflation and was now considering targeting core inflation. But most brazenly, it chose to emphasise false core inflation as its target, that is, core inflation including petrol. No central bank in the world targets false core; it seems the RBI felt it was appropriate to do so because oil prices were hovering round $55/barrel and domestic petrol prices were inflating at 18 per cent per annum. So false core was sticky at 5 per cent, as the MPC “rightly” concluded. However, no sooner had the MPC penned this excuse that oil prices (internationally and domestically) began to fall. And, along with it, false core inflation. The April CPI data, released just days after the MPC excuses on April 7, now showed even false core hovering around 4.4 per cent, having declined from 5 per cent a month earlier.
True core inflation — CPI minus food minus energy minus petrol — meanwhile continued its downward trend, 5.3 per cent in April 2016; April 2017, it registered 4.2 per cent.

That's a pretty strong indictment. It's necessary to require the MPC to publish its forecasting record- forecast inflation versus actual - every time it meets. There is a fundamental problem with the MPC mandate: the MPC has to explain if inflation exceeds six per cent but not if inflation falls below 4 per cent (unless it dips below 2 per cent which is a remote possibility). Put differently, the MPC is accountable for inflation but not for growth. There has to be a way to address this issue. A good starting point is to publish the MPC's forecasting record.

Goodbye to central bank independence?

Central bank independence is an idea that came out of the stagflation in advanced economies of the 1970s. High inflation did not lead to reduced unemployment- the world discovered the truth that the Philipps curve trade-off exists only in the short-run. If you keep boosting money supply for too long, you get only inflation without the associated benefits of reduced unemployment.

So politicians decided they would leave it to central banks to decide monetary policy as a means of imposing overall macroeconomic discipline. Central banks would then no longer underwrite unlimited government borrowings and this was good for the economy.

Now central bank independence is under threat- and it's not on account of politicians, the Economist points out. The problem is the steady decline in interest rates in recent years, culminating in negative interest rates in many countries. Monetary policy no longer appears effective and this undermines the authority of central banks.

Moreover, the tool that some banks have resorted to, Quantitative Easing, which involves massive purchases of government bonds, amounts to the purchase of government debt using newly printed money- precisely what central bank independence was intended to avoid!

At the same time, there's a general sense that fiscal stimulus has a key role to play in the present situation:

Although economists remain broadly in favour of central-bank independence, the amount of new research affirming the importance of stimulatory fiscal policy is growing. The continued economic doldrums are also creating a political opening for more aggressive fiscal action. On August 2nd the Japanese government announced new stimulus measures worth ¥4.6 trillion ($45 billion) this year. Both American presidential contenders have plans that will raise government deficits, and the British government has abandoned its target of balancing the budget by 2020. Low interest rates have emboldened politicians who might otherwise have ignored the calls of frustrated voters for fear of the bond-market vigilantes.

As monetary policy wanes in influence relative to fiscal policy, so will the importance of central banks.

Here in India, we have seen a movement away from the commitment to a 4 per cent inflation target on the part of the RBI. This has at least partly to do with the perception of the political authority that rigidity in respect of the inflation target of 4 per cent was coming in the way of higher economic growth.

Central bank independence is not ordained by the gods. It was a mechanism devised by politicians in response to a particular economic situation. You can count of politicians to reduce its importance in a different economic situation.

What explains RBI's surprise rate cut?

The RBI's rate cut of 50 basis points was a huge surprise to everybody. I would have thought the market reaction would be ecstatic. It hasn't quite been that although the market indices have risen. I argued for a 50 bp cut in an article in the Hindu (Hemmed in by the safety net) on September 28 but did not expect the RBI to oblige.

So, what caused the RBI governor to change his mind?

Many analysts point to the global economy, the inflation rate being within the 6% target for January 2016 and the downward revision in the growth rate for India to 7.4%. And yet, none of these was seen as influencing the RBI in the run-up to the budget. It's also hard to buy the contention that the RBI has tilted in favour of growth: the governor is sticking to the glide path for inflation and is setting his sights on bringing inflation down to 5% by 2017. That being the case, the RBI would have been more comfortable delivering a cut of just 25 bp. Why a 50 bp cut?

My guess is that the steep cut has to do with the NPA and capital position of public sector banks. The woes of the steel industry have been added to those of the infrastructure sector and there's no let up in pressure on the NPA front. There's only so much additional capital the government can provide. However, banks are holding to excess SLR securities- around 29% of liabilities against the mandated 21.5%. A rate cut boosts the value of these holdings and gives capital gains to banks. This helps them make provisions against growing NPAs. In the process, the rate cut does provide  a stimulus to the economy and especially to retail credit.

If the market response has been somewhat tepid, it could be because it's hard to conclude that this is the beginning of a round of rate cuts. Instead, as the governor mentioned, the RBI has front-loaded rate cuts, delivered these at one go. It's unlikely that there is much more to look forward to in the year ahead, especially if the Fed rate hike comes through.

We need to get growth over 8%. It would have helped if the governor had reiterated his commitment to the 6% target for January 2016 and omitted any mention of a target for 2017. That he did not do so suggests that bringing down inflation further remains the priority.

Central bank independence: India does better than Turkey and Brazil?

Well, that's what an article in the FT claims. Both Turkey and Brazil have inflation targeting as the objective of their central banks, as India does now. But both countries have missed their targets- thanks to political pressures, according to the article:

Recep Tayyip Erdogan, Turkey’s president, has repeatedly tried publicly to bully the central bank into cutting interest rates, calling its governor a “traitor” and evoking the peculiarly paranoid notion of an “interest rate lobby” that was damaging Turkey by demanding high borrowing costs.

In Brazil, the central bank is still part of the finance ministry, and its head is answerable to the president. Its governors are also appointed by the president and have no fixed terms. In last October’s election, Marina Silva, the Brazilian Socialist party candidate, argued strongly that the central bank had done too little to control inflation in an election year because of political pressure from Dilma Rousseff, the president.

In India, in contrast, the author contends, the RBI has managed to get on with its job of containing inflation, thanks to a determined person at the top. So it's best to leave inflation targeting to technocrats free from any political interference.

Well, matters are not that simple. Inflation targeting is not the norm amongst central banks. The Fed does not follow inflation targeting nor does the Bank of England. Secondly, if we even believe in inflation targeting, leaving matters entirely to the RBI is not a great idea. There is always need for an external input. And government nominees are not necessarily handmaidens of the government. Economists nominated by the government have their own reputations to protect. Indeed, one could argue that they are, perhaps, better placed to act independently that some of those inside RBI, as the latter would have their own career ambitions to worry about and have every incentive to stay on the right side of the government.

Lastly, what constitutes 'optimal' or 'threshold' inflation is not easily determined. The RBI has set itself a target of 6% for January 2016. A recent paper in EPW points out that there is a wide range for inflation thresholds, as estimated by various studies. One study, which covered 127 countries in the period 1960-92, found that the inflation threshold is as high as 20% if outliers (those with hyperinflation of over 40%) are excluded from the sample. The EPW paper itself places the threshold at 11% for Asia, 23.5% for Latin America and the Caribbean, and 23.6% for sub-Saharan Africa.

There could be costs - in terms of lost output- to keeping inflation below a threshold if the the threshold is incorrect. Given the difficulties in estimation, there is a good chance that the threshold is indeed incorrect. That's why being fixated on inflation targeting may not be a good idea. Politicians, including those in Turkey and Brazil, may have a point when they complain about the monetary polices of their central banks.

RBI autonomy

What exactly is RBI autonomy in monetary policy? Does it set the policy objective (say, primary focus on inflation), the inflation target as well as the means to achieve the target? Are all these the province of the RBI? Or does the government have a say in these matters?

I would think that the government has the right to decide the primary objective and also the inflation target. When it comes to the means of achieving the objective, the decision is primarily that of the RBI but the government should be involved in decision-making.

That is how RBI governors have viewed matters all these years. They have ensured that the government is duly consulted on monetary policy matters and then taken the final call on interest rates. Over the past year, however, the RBI has sought to change the situation somewhat. The Urjit Patel committee recommended that inflation targeting would be the primary objective and it also set the inflation targets to be met. The interest rate policy to meet the targets has also been decided by the RBI. It does seem that there is over-reach on the part of RBI.

Now, moves are afoot in  government to get the balance right between itself and the RBI. The government wants to set the inflation target. Monetary policy will be decided by a committee dominated by outsiders. This amounts to a dilution of the RBI's autonomy as it takes away the RBI governor's right to be the final authority on interest rates. I guess the government's moves were inevitable given the attempt on the part of the RBI to be the sole decision-maker in monetary policy matters.

More in my article in the Hindu, The limits to autonomy.

Monetary policy: the case for an interest rate cut

Industry as well some members of the fraternity of economists are clamouring for a rate cut on the ground that it will stimulate growth. Those oppose to it say the RBI can't afford a rate cut when consumer inflation is in the double digits (and has risen lately) and the current account deficit is alarming. I think there is a case for a rate cut but not because it will stimulate growth. The case I would make is a different one.

Let me address the reasons given for not having a rate cut. Inflation is now driven by food inflation and demand management can't do much about that. As for the impact of a rate cut on the CAD, the RBI governor addressed the issue in his recent I G Patel memorial lecture at Oxford:

The risk of the CAD widening further because of the stimulus offered by the rate cut is much less than apprehended for a host of reasons. First, when growth is sluggish as is the case now, the rate cut is unlikely to translate into import demand. Second, the rate cut was a response to softening inflation. Lower inflation will improve the competitiveness of our exports. Third, the rate cut was effected during a phase of easing commodity prices - particularly of oil - which will reduce the pressure on the CAD. Finally, empirical evidence shows that in emerging economies such as India, import demand is less a function of lower interest rate than of increased income. In other words, the marginal propensity to import by borrowing money is small.

However, the case for a rate cut is not that it will stimulate growth by boosting investment. Real interest rates today are way below the real interest rate of 7.8% in the 2004-08 boom period, so high interest rates are not why growth is being held back. The villains are policy and regulatory uncertainty and a weak global environment. There is not a damned thing fiscal policy can do to stimulate growth because if the fiscal deficit is not brought down as promised, the rating agencies will downgrade us.

The finance minister has said his principal worry is the CAD. His budget was driven by his concern that any fiscal deterioration would cause a downgrade and result in a flight of FII flows. We need, as he said, $75 bn to finance our CAD. An interest rate cut  would improve corporate profits and valuations and hence keep FII interest in India alive. It would also help banks access capital needed to meet Basel 3 norms and ease credit constraints in growth which seem to have emerged. (Proof: SLR holdings are 30% instead of the mandatory 23%). A cut in interest rate, as the RBI governor points out in his lecture, might cause FII flows into debt to slow down but it would still have a positive effect on equities. Monetary policy would thus reinforce fiscal policy in sustaining the financing the our large CAD.

More in ET column, Will Mint Street and Dalal Street unit to sustain FII flows?

  

RBI stays bullish

The RBI's growth forecast in its just unveiled annual monetary policy, I am pleased to say, is identical to mine:

In view of these factors, overall, for policy purposes, real GDP growth in 2008-09 may be placed in the range of 8.0 to 8.5 per cent, assuming that (a) global financial and commodity markets and real economy will be broadly aligned with the central scenario as currently assessed and (b) domestically, normal monsoon conditions prevail.

The central bank, being a central bank, has hedged its forecast with the mandatory qualifications but these are not terribly consequential. I don't see any reason to think that the global outlook will change materially; and the news on the agricultural front has been good.

Remember, every single forecast on the Indian economy in the past five years has been an under-estimate. So, I wouldn't be surprised if growth hits 9%. That would be the decisive deathblow to those who claim that the spurt in economic growth was a fluke created by the global boom. If you can grow at 8-9% in these conditions.........