`Long on language and short on measures' is how the Reserve Bank of India Governor, Dr Y. V. Reddy, described the Annual Policy Statement for 2007-08, announced last Tuesday. The `short' part of the cryptic phrase may interest experts who generally like to analyse and dissect the policy to pick holes in the measures. For the rest of us, who are ready for a long haul, a patient ploughing through, of the 73-page, 30,000-word, two-lakh-character output from the RBI can unearth many examples of linguistic acrobatics.

Let's begin on a note of `overall optimism' that the latest statistical estimates `have vindicated', in tune perhaps with `successive upward revisions in growth projections by various agencies'. Explains Dr Reddy that "while the momentum of economic activity and the turnaround in the interest rate cycle resulted in an increase of 17.7 per cent in interest payments in contrast to the decline recorded in the preceding two years, higher growth in sales and gross profits in relation to interest payments ensured a lower interest burden (that is, interest payments relative to gross profits) and interest cost to sales... "

Before you slow down from the whirr the `turnaround' caused, add fizz to your fluffiness by knowing that "the acceleration in real activity propelled a sizeable expansion in monetary and banking aggregates."

Are these bodings for good or bad, you may be pardoned for wondering, because such uncertainty is possibly a widespread phenomenon. For, how else would you explain why `business confidence surveys conducted by other agencies present a somewhat mixed picture'? Concedes Dr Reddy that `globalisation has brought in its train considerable fuzziness in reading underlying macroeconomic and financial developments, obscuring signals from financial prices and clouding the monetary authority's gauge of the performance of the real economy.'

Inflation inflection

Though the Finance Minister recently said that the RBI has no control over prices of items such as tomato, the Credit Policy had a lot to say about inflation. "It is important to undertake a careful assessment of the manner in which inflation is evolving," observed Dr Reddy, considering the many `upward pressures on headline inflation'. Globally, `monetary policy authorities are inclined to continue to regard inflation as a major global risk and are vigilant about threats to inflation expectations,' he informed us.

And he fretted, "There is considerable difficulty faced by monetary authorities across the world in detecting and measuring inflation, especially inflation expectations."

Is there a foreign hand to the price of pyaaj and aalu? Maybe, as `domestic prices are largely mirroring global trends' and `export demand is emerging as a significant determinant of inflation'. It may not elevate your mood to know that `elevated prices of primary food articles, which have a higher weightage in the CPI basket relative to the WPI, have been the main drivers of consumer prices and the major cause of the divergence between inflation rates based on the CPI and the WPI.'

Also, "In conjunction with emerging strains on capacity, elevated asset prices and the surging demand for bank credit, the rising prices of manufactures constitute the demand pressures on inflation."

The Governor, therefore, states grimly, "Currently ruling above indicative projections in terms of wholesale prices and at unconscionable levels in terms of consumer prices, inflation represents the key downside risk to the evolving macroeconomic outlook." Yet, he is determined `to continue to demonstrate that inflation beyond the tolerance threshold of the Reserve Bank is unacceptable and that the resolve to ensure price stability is always backed by timely and appropriate policy responses'.

Apart from that resolve, there are two other factors to draw comfort from. One, we aren't alone. `High expansion in money supply has become a worldwide phenomenon, resulting in its progressive de-emphasis in monetary analysis.' All over the world, `headline inflation has picked up in the wake of increase in commodity prices, and core inflation has also generally remained firm.' Thankfully, however, `most Asian EMEs (AEMEs) have recorded strong growth with reasonably well-anchored inflation expectations'.

And the second factor is that the magicians on the Mint Street are deploying `a combination of fiscal, external and supply management policies supplemented and complemented by ongoing monetary measures,' for the effective containment of inflation, `drawing from the analysis of inflation dynamics'. The policy stance was underpinned by a commitment to respond swiftly with all possible measures to developments impinging on inflation expectations and the growth momentum, assures Dr Reddy. As a result, "Despite sizeable movements in major international currencies, the pass-through to domestic inflation has been muted."

Liquidity overhang

If it had missed you that `during the year, the financial markets shifted from conditions of easy liquidity to occasional spells of tightness necessitating injection of liquidity through the LAF (not learners' air force, but Liquidity Adjustment Facility), better look up. Do you see `the total overhang of liquidity under the LAF, the Market Stabilisation Scheme (MSS) and surplus cash balances of the Central Government'?

Ever wondered what happens `in an environment of above-trend growth in the world economy and abundant liquidity'? Investors are `prepared to purchase risky assets at relatively high prices'. Dangerously, `The perceived risks arising mainly out of the prospects of withdrawal of liquidity and global imbalances do not appear to be reflected in the pricing of risks.' Not a happy situation for the RBI, because "monitoring risks has become very difficult for the regulators, due to emergence of large conglomerates, sophisticated market instruments such as derivatives, presence of players like hedge funds and shifting of financial risks from well-regulated to weakly or less regulated segments." Accentuating the unease is the worry `that a sharp reversal of carry trades could precipitate liquidity stress and affect near-term prospects of emerging market economies, should there occur a generalised search for safe haven'.

Dark fears would turn darker if you were to discover that "the overnight rates in the market repo and collateralised borrowing and lending obligations (CBLO) segments, which were around the lower end of the LAF rate corridor till May 2006, started hardening in June in response to underlying liquidity conditions... "

Bankers' English

You can bank on the Credit Policy's finance-speak to enrich your phrase bank. Try, for instance, mouthing, `With some volatility in the second half amidst heightened activity... volumes increased steadily and interest rates firmed up in all segments,' and you can be assured of heightened attention from all disoriented directions. Unrelenting, unleash more, notwithstanding `the onset of a durable pick-up in aggregate spending easing.'

Your audience may experience `impulses for expansion' juxtaposed with `episodes of tightness,' when treated with `an inversion of the yield curve and a narrowing of yield spreads,' or `upsurge of demand pressures... with a cyclical component', but before convulsions set in, offer the hapless happy dreams of `sustained buoyancy... and containment of growth', anchored `financial stability,' `a concerted and calibrated move to rebalance the regulatory and supervisory role' coupled with `a broad-based, participative and consultative approach,' and `operational flexibility and... greater manoeuvrability in monetary management.'

Din into their ears that `lumpiness and gestation' are `inevitable in building production capacities', and that they should not `delay the supply response to the impetus from aggregate demand and realisation of the capacity expansion'. Cajole everybody, saying that `time paths for decision making' are `not formally constrained,' and that `sustained strength and vibrancy' reflect, as you might have guessed, `robust macroeconomic fundamentals.'

Urge those around you to shrug off `initial expectations of a deceleration,' though `flows do have the potential of reversing rapidly in response to the withdrawal of monetary accommodation now taking place.'

With `risk appetite... increased in search of higher yields,' the afflicted may ask for more, as do `institutional investors' who are not put off by `compression of spreads... which cannot be fully justified by improved fundamentals.' Watch out: "In the event of a loss of risk appetite and consequent unwinding of leveraged positions, there could be serious adverse effects... "

The Governor sombrely declares that `the importance of communication has received significant emphasis in the recent period' and so `the RBI has been reaching out in order to encompass the widest sections of society in the financial system through the spread of financial education so as to encourage a more informed evaluation of its policies... '

Noble intentions, you'd agree.

D. Murali