India’s macro-indicators present not one but several Hindu constants for the last twenty one years: money supply growth, more constant than the northern star, on robotic control at 17 percent per annum; industrial production growth, on automatic pilot at 6-7 percent; consolidated fiscal deficit, or government profligacy, constant at 10 percent; investment, constant at 23-24 percent; GDP growth, constant at 5.7 percent. It is difficult for analysts to decipher any relationship from several time-series of constants, though the desire to keep one’s job has led many a researcher to estimate models of Indian macro-behavior.

Important non-constants suggest some role for policy. Tariff rates are down from barbaric rates, though they have ways to go before they hit a civilized level. The rupee is no longer over-valued. Export growth, and trade shares, have risen to near normal levels, from abysmally low levels only a decade ago. Population growth is down by 0.5 percent, suggesting that constant GDP growth has been accompanied by increasing productivity growth.

There is one very important change in the Indian economy. This is the decline in the rate of inflation, from close to double digits level to less than 4 percent today. But the literally poor manufacturers (excepting the big-time winners of an annual Rs. 12,000 crore subsidy, the fertilizer industry) have had to face another Hindu constant - high and managed nominal interest rates for savings deposits, and therefore high and managed borrowing rates.

It is in this context that Mr. Yashwant Sinha, and his advisers, deserve much praise. He recognized the import of declining inflation early in 1998 when he cut administered interest rates by 0.5 percent, and another 3 percent since. Mr. Sinha also correctly realized that such cuts were the equivalent of "pissing in the wind"; interest rates did not fall as fast as inflation. And inflation is set to decline further, by about 1.5 percent, once the remaining effects of last years fuel price increase are out of the system.

This is where the RBI comes in. Mr. Sinha appointed a committee, led by Deputy Governor of RBI, Dr. Y.V. Reddy, to reform the administered rate system on postal savings deposits. Of course, the correct decision would be to let the market set the level of deposit rates, but in India correct decisions often get hijacked by the "do not rock the boat" citizens. Of course that means that the boat does not move, which is why money markets have been stuck in a non-reform bay for so long.

Failing the correct decision, the committee is likely to answer three questions: what should the level of such rates be today; how should they be indexed ; and how are states to raise monies needed for development. (In case you have been living in ostrichland, the postal deposits have been the major source of funding state expenditures the last few years. Briefly, the postal deposits have acted as a classic chit fund-Ponzi scheme - keep borrowing today, especially since you will never have to pay the money back).

The answers do not involve rocket-science: riskless deposits should return around 0 percent above inflation in slowdowns and 2 percent in booms, or 1 percent on average. Which inflation measure to use - choose any. How should expected inflation be calculated - by spot inflation i.e. expected inflation is best predicted by present (year- on-year) inflation. And allow states to raise money from bond issues etc. at whatever price they are able to borrow. This will help develop our capital markets; and will discipline our politicians who passionately believe that economic reforms do not win votes as long as you can steal from the rich - and the poor.

Besides interest rates, the RBI also "controls" our stock markets. SEBI has been in reform over-drive, especially after world markets collapsed and the institutional characteristics of the market came into question. Indeed, the Indian stock market has come a long way since 1993, and now that the UTI-64 fiasco has almost run its course, we do have a state of the art stock market. Except there is no liquidity. Why ? Because there is no mechanism for leverage, the heart of any functioning stock market. Who controls the heart ? The RBI, for it controls whether banks can lend money for stock investments. Banks do not lend because bank officers are fired if they make banking decisions. But if a bank officer buys government securities, she gets promoted. And she gets promoted to general manager if bank deposits are put into higher yielding, and riskless, postal deposits. The RBI actively helps the flow of this circular trading, and it is time its bluff was called. As well as the bluff of the politicians, and the Joint Parliamentary Committees, and the CAG, and the CBI, whose greatest function is to punish bureaucrats who made the mistake of buying some equity high and selling it low - and punishing them only under political provocation. Time to put Merrill Lynch, Morgan Stanley, Templeton and me and everybody else in jail.

RBI can put some sanity in banking by making borrowing by the non-government sector easier. But non-government borrowing is by "bad" people, by individuals and corporates whose activity does not directly "help the poor". But what if the banking sector lent money to only government institutions like the National Stock Exchange (NSE) for purchases of stock? By putting up only 50 percent margin (like in the US), the banks have a fully collateralized loan, and a loan guaranteed by the NSE i.e. the government. Idle bank money can be put to work, week by week, rupee by rupee. The NSE lends to brokers who lend to investors. The circle is complete, only this time it is not circular trading in Ponzi schemes or government securities.

What is the risk to the system? None. To the banking system? None, except they make higher riskless profits. This measure of bank lending for stocks is a necessary condition for a well functioning capital (money and stocks and foreign exchange) market. It is not a measure to boost the capital market. Markets go up and down, and artificial means of propping up the market always fail. Like schemes to bring back badla through the back door.

We have an industrial slowdown in India and a threat of a recession. In a memorable speech in October 1999, Dr. Bimal Jalan, RBI governor, stated that Indian capital markets needed reform, that something was wrong with the "structure" of interest rates. This hint was accepted by the Ministry of Finance which in a bold move has asked the RBI to make right the structure.

A globalized world does not allow the luxury of tinkerization. Indeed, it rightly punishes the cowardly and the bureaucratic. The RBI should get into reform mode, because only it can allow India to reach its potential. No longer can we, or the RBI, blame the politicians. The whole world is watching.