By Ruma Dubey

We always say, “look at the bigger picture”. But it is only when we from far, keeping a distance from the big picture that we come to realize that it is the details which go on to create the big picture. The trick is to not lose ourselves, neither in the details nor in the big picture but look at everything from a distance, like a mumukshu; only then can we see the truth. That’s some heavy philosophy but it applies to all aspects of our lives, even the very maaya world we live in.

Lets look at the truth of this philosophy in the grossest of the gross forms of material world – money. If we look carefully at all banks of the world, we see a pattern emerging. This pattern is before and after 2008.

Before 2008, before the financial world collapsed, every bank in the world, be it the European Central Bank (ECB), Federal Reserve or our very own RBI, each reacted on influencing factors from within the country. Like ECB, looked at its own growth and inflation rates and accordingly designed policies. Ditto for Fed Reserve. RBI’s very objective is to keep a close watch on inflation and forex volatilities; growth and unemployment rates do not figure out in RBI’s watch tower. And RBI followed that.

Post 2008, all this changed, with most of the banks across the world reacting to factors from outside their country. Of course, USA created the entire mess so it would be right to say that it continued looking within. But if earlier, these banks were working alone, they now worked in tandem. That was the big change. Like USA, to save the country and its people from the collapse, the Fed introduced the concept of Quantitative Easing (QE), where it printed money to ward off a bigger crisis. ECB reacted by putting in its own stimulus – Long term refinancing operations (LTROs). Both, the US Fed as well as the ECB took steps to infuse liquidity into their own markets. They both were grappling with the same issues and took similar, yet different routes to infuse liquidity. At that time, both Europe as well as USA had very low inflation rates, so there was no question of rate hikes. In fact they went on a rate reducing spree.

RBI, on the other hand, was dealing with high inflation and very volatile forex markets. And like the rest of the world, RBI too reacted by cutting interest rates – it first cut rate by a percentage point to 6.5% in Dec’08, then another 1% cut in Jan 2009 to 5.5% and then 0.5% rate cut in March’09 to 5%. The Indian Govt also tried to do its bit to infuse liquidity  by cutting CVAT rates, giving interest subventions, export incentive schemes, housing loan incentives, doubled limits under credit guarantee scheme for small enterprises, increased spend on plan and non-plan expenditures.  In China, it is the Govt which does all – so its introduced its 4 trillion Yuan stimulus package (14% of 2008 GDP) for 2009 and 2010. Its People’s Bank of China also infused liquidity by supporting through easy credit and this led to an inundation of liquidity, leading to inter-bank market lower than interest on deposits with commercial banks.

Every country did its bit, either through Govt stimulus packages or through their central banks; the bottomline was that 2008 crisis unified the world in that sense. If the role of banks before 2008 was to adjust interest rates to variation in the inflation outlook, this, post 2008, changed across the world where monetary policy was used as the first powerful instrument to sustain and strengthen aggregate demand and economic activity. Right from Australia, Canada, entire Europe, Indonesia, Japan, North Korea, UK, USA, Vietnam, New Zealand, Mexico, Malaysia, Norway, Nigeria, Brazil, all cut interest rates. This was one time in the world when all banks moved together in tandem to reduce rates. (Take a look at the table given below).

Today, almost 6 years after the crisis, each country is once again looking inwards and once again concentrating on internal factors to decide policy action and not global events. USA is close to winding off its stimulus by October and a rate hike could come in by early next year. The Eurozone though remains in trouble with inflation in July’14 falling to its lowest level since the height of the financial crisis, sliding further into what the ECB calls the "danger zone". The ECB considers that an inflation rate of below 1% poses a risk of deflation. This data makes it pretty clear now the ECB will very soon get onto a more potent drive of QE, buy assets such as government debt with newly created money in an effort to push inflation up.  China too has low inflation but it is not worried and going on full throttle with its set of fiscal stimulus – the change from pre-2008 to post-2008 is that China now wants to boost domestic demand and not remain so dependent on exports.

And here, back home, we are dealing with high inflation and rate hikes have been pretty rampant. Tomorrow, one can expect  a status quo policy as the Governor might want to wait for the entire kharif crop report before making any decision.

Thus to come back to our philosophy, when we looked at the details, it is only then that we saw how all countries were united during the crisis and how we all are back to domestic issues deciding policy action, with inflation once again becoming a priority across the world.

Yes, most situations in life, when looked at from a distance give us a much clearer perspective, shows us more clearly the road ahead. That’s the simple truth.