Thanks to the shocking GDP number released on 31 May, the clamour to "do something" has effectively come to mean that the Reserve Bank of India (RBI) must cut rates.
No one sets great store by what the government can or should do, despite the flurry of activity on infrastructure projects initiated by the PMO this week. The first Little-Bang reform move - the pension bill - has already turned out to be a dud, thanks to objections from Kolaveri Didi.
The let's-cut-rates lobby now has further ammo with China unexpectedly easing rates on Thursday in order to boost growth. And since we are such keen China watchers, we will think this must be further justification for Duvvuri Subbarao to suppress his doubts on the government's reformist intentions and follow suit. The markets already have "hip-hip-hurray" on their lips, if the Sensex's behaviour is any indication.
Subbarao should hold his horses.
He should instead look to Big Ben and Moderate Mario for cues, not North Block. US Fed Chairman Ben Bernanke, despite signs of a slowing US economy, declined to send smoke signals that would suggest that another round of quantitative easing (QE3) or some other form of monetary stimulus is round the corner.
European Central Bank (ECB) President Mario Draghi also doused widespread expectations of a rate cut to stimulate the eurozone on Wednesday.
Both Ben and Mario are aware of the risks to growth. Thus even while holding back on monetary easing, they promised to keep their powder dry. Both said the same things. In his testimony to Congressional Joint Economic Committee on Thursday, Bernanke said: "As always, the Federal Reserve remains prepared to take action as needed to protect the US financial system and economy in the event that financial stresses escalate."
Ditto for Draghi. He said, "we'll monitor closely all the developments and we'll stand ready to act" if necessary. He also disclosed that the decision to hold rates was not unanimous.
Now what are Ben and Mario really trying to tell us?
The answer is simple - and it is no different from what Subbarao himself has been trying to say and do - force politicians to act.
The problem with all economies is that finance ministers are not doing their bit to tighten belts or take tough measures, leaving the burden of stimulating a recovery entirely on the shoulders of the moneymen.
Continuous monetary laxity can only stoke inflation and kill off the very recovery it is trying to stoke. This is why the Reserve Bank had held off till April when it surprised the markets by cutting the repo rate by 50 basis points (0.5 percent) despite signs of an economic slowdown.
But inflation is not coming down, and the government is not raising diesel prices or attempting any kind of reform. Meetings in the PMO do not constitute reform.
So why should Subbarao move to make things easier for politicians and court opprobrium for higher inflation? He is anyway being blamed for the slowdown he was not responsible for. The finance minister blamed the eurozone crisis and high interest rates for it.
Subbarao should ignore the general clamour and ask himself a simple question: are rates the priority or the rupee?
Given our huge external deficit, the rupee needs to be stabilised before interest rates are brought down. Bringing interest rates down before inflation is controlled will send the wrong signals. Here why.
One, lowering the repo rate by even 0.25 percent to 7.75 percent means negative returns for savers will worsen. Remember, consumer price inflation is above 10 percent, and could rise higher. Rajeev Malik, Senior Economist at CLSA, believes that May Wholesale Price Index will rise to 7.6 percent. The RBI policy is due on 18 June.
Two, when the US and ECB, despite flagging economies, can hold rates and monetary easing, India has no business to cut rates. It will make the rupee a less attractive currency to foreign investors. Foreign flows, already shy due to risk-aversion, will turn more bearish and capital flows will taper off further.
Three, if lower rates lead to a weaker rupee, it will accentuate imported inflation. Even if oil prices fall, our pump prices will moderate less.
Four, lowering rates will ease the pressure on politicians to act. And this is the worst thing the Reserve Bank can do right now when politicians are just beginning to think, that maybe - just maybe - they must "do something".
As Malik points out: "India surely needs a policy response but it has to come from the government, not RBI right away, especially after the bigger-than-expected 50 basis points cut in April. Bottomline: The central bank cannot make up for government's incompetence."
Quite. Subbarao must defend the rupee and keep rates where they are. But like Ben and Mario, he can say he is ready to act at a moment's notice if growth slips further.
By cutting rates prematurely, he will be bailing out politicians, not the Indian economy.