There goes ideology

Apologies for covering the IE again, but today's editorial is simply abysmal ("There goes RBI.") That may be because it has Ila Patnaik's fingerprints all over it.

Yet even Patnaik can't get her economics this wrong: "raising rates is not a good instrument for tackling inflation." Words fail me. This is a national newspaper, how can it get something so basic so completely wrong? How else can inflation be tackled, according to the oracular wisdom of the Express? It doesn't say! Now, every editorial can of course take a position, but doesn't basic argumentation call for a solution to be offered once you've pointed out your opponent's weak points? Flabbergasting.

And what are these weaknesses? The absence of the famed BCD nexus, (straight from the Ajay Shah/Ila Patnaik playbook) and the existence of a huge informal sector (which is an argument for even greater rate hikes, incidentally). All that we can surmise is that the RBI shouldn't have been defending the rupee and flooding the system with liquidity, but we can only make this leap if we have read Patnaik's previous editorial (see below). The action that the RBI should have taken? No action. Please get out of the way, central bankers, as all you can do is spoil things. Neoliberalism 101.

For clarity's sake, note that you can either have a bank-based financial system, as did Germany and Japan for years, or you can have an Anglo-Saxon market-based system. Clearly India has the former, although it is trying to cobble together the latter. The effort is indeed incomplete, but for complicated reasons. The RBI is not independent of the government, why would you blame it for its actions? It is this deeper political economy that is being addressed in a roundabout manner in this editorial: reform the RBI, make it accountable to the markets.

But this is a larger struggle, one that the neoliberals will hopefully lose. With the institutions as they are, the way to curb the monetary economy is to regulate the banks. Either way, under banks or markets, interest rates are the operational variable!