A barrage of sometimes conflicting statements from government officials over economic policy has fuelled concerns that excessive chatter causes unnecessary market volatility in India and undermines central bank independence. The frequent talk is magnified by the rise of India's fiercely competitive 24-hour business TV channels, hungry for sound bites from often elderly politicians and long-time civil servants who occasionally seem oblivious to market impact. At the heart of the matter may be the growing pains of an emerging giant of 1.2 billion people. In two decades, India has transformed itself from a state-dominated economy to an increasingly open market, with all the risks that entails. Now as a rival to China, India's every move is in the spotlight as its growth helps drive a world recovery. But a tendency to over-promise, from targets for building roads and power plants to keeping fiscal deficits in check, can erode the credibility of predictions. “Everyone talking at the drop of a hat creates unnecessary volatility in the market,” said Nirav Dalal, head of debt capital markets at Mumbai-based Yes Bank. This year, Farm Minister Sharad Pawar was criticized by both the ruling Congress party and the opposition for pushing up local sugar prices after he said that India may need large imports. While India is not alone when it comes to assorted officials weighing in on monetary, fiscal and economic matters, the frequency of statements from high-level sources sets it apart. “Relative to other East Asian economies, there is a lot more seemingly credible commentary and analysis, some of which may be contradictory,” said UBS economist Philip Wyatt. “I think that reflects India's size, India's need to upgrade its institutions in line with markets, but at the same time the ability of senior officials in different arms of government to have a mouthpiece,” said Wyatt, who is based in Hong Kong. Government commentary on monetary policy appears to challenge the central bank's independence. While the government is eager to maintain pro-growth policies, the Reserve Bank of India (RBI) chief Duvvuri Subbarao is worried about inflation and a nagging fiscal deficit. “I believe the government thinks that the RBI has an important role to play, but that ultimately it's there mainly to support government pro-growth policies,” said Wyatt. Before the RBI's last policy review, the prime minister's economic advisor C. Rangarajan called for rates to remain unchanged but said a cut in liquidity might help trim inflation expectations. Bond yields fell 2 basis points after his comments. The central bank ultimately left rates unchanged but raised the cash reserve ratio for banks more than was expected.
