Par Patnaik

So is here Ila Patnaik in the IE again, going on about the monetary policy framework and trying to beat poor ol' Dr. Reddy over the head with the Mistry/Rajan reports, ("Pricing the Rupee"). I mean, it's not like she doesn't have a point, but has she no others?

One of her main grouses is that the RBI is burdened with too many objectives (public debt management, banking regulation, exchange rate management, monetary policy, etc.), and that these often come into conflict with each other.

The main bugbear here is the RBI's currency trading, wherein the RBI is basically running a peg to the dollar and therefore has to buy up USD as they come flying into the country least the rupee appreciate. Buying up all these dollars means issuing lots of rupees to do so, and this hits inflation unless this issue is "sterilized" by issuing bonds to mop them up. As Patnaik notes, this stopped happening late last year, and the RBI switched to using hike in the Cash Reserve Ratio to suck cash out instead. Rather than letting the rupee rise and making oil imports cheaper, the RBI kept it low and added to the monetary base in the process. Both measures hike inflation. Reform the RBI to focus on inflation and forget everything else, says Patnaik, and this can't happen.

So is the RBI mad? What's its rationale? For Patnaik, it is "to encourage growth in exports." She makes no mention of the spiralling current account deficit which, if it gets much larger, could make our reserves look puny in the event of a run on the economy. Further, because our reserves are the result of incoming flows rather than earned exports, they are borrowed. So our external position is not that comfortable, and all her recommendations (lift capital controls, open up ECBs and lift NRI caps) could make it worse. The fiscal situation doesn't help matters.

Secondly, what is this model of reform? Transparency? As if that were a virtue in itself. Transparency is the cry of those who wish to hem in the publicly-accountable state and make it predictable so that the unaccountable market can go ahead and make decisions for us. It's a word that uses science to hide politics. She makes no mention of the fact the Bank of England's model of the separation of banking reform and monetary policy was seen as one of the root causes of the recent credit crisis in England, wherein a lack of coordination between the FSA and the BoE made the Northern Rock situation worse.

If she's going to use economic "science" in her arguments, she should not abuse the implicit trust placed in her as an academic to push only one side of the argument. Her inability to be even handed shows her to be an ideologue, pure and simple. Par for the course, Ms. Patnaik.