If the RBI is make-believe, why not get rid of it?

"The Reserve Bank of India (RBI) on Friday kept rates unchanged as inflation remained stubbornly high, but unleashed an array of other tools to reduce borrowing costs in a bid to revive growth in Asia's third largest economy," wrote Gopika Gopakumar. "Citing inflation as a transient worry, the central bank retained its accommodative policy stance with reviving growth as the primary objective." "To push credit flow into the economy", the RBI also said that "it will introduce an on-tap window for banks to borrow up to Rs 1 trillion and invest in corporate bonds and other debt instruments of companies in certain sectors". "RBI also rapped the bond market for demanding a higher yield on sovereign papers, which led to the devolvement of recent government auctions. Das said market participants and RBI should share the responsibility of ensuring the orderly evolution of the yield curve." Interesting. Our central bank is openly trying to game the bond market. At a recent auction the RBI did not find any buyers for its bonds at the kind of yields it was prepared to accept and a large chunk of bonds remained unsold. Granted sovereign bonds are guaranteed payment if held to maturity but that will be at the face value of the bonds. Yields are inversely proportional to the price of bonds so dealers will be buying the bonds at a higher price if they accept yields that the RBI is forcing on them. A meeting of the Monetary Policy Committee last week kept the benchmark lending rate at 4% and committed to an accommodative monetary policy well into next year despite expectation of retail inflation rising to 6.8% in September. "It is time for India to shed the make-believe that inflation targeting is the ideal objective of monetary policy, and accept that output and jobs growth and financial stability are other valid objectives of monetary policy as well," wrote an editorial in The Economic Times. This means that the RBI is being asked to take over functions of the government. If inflation is to be allowed to go unchecked, at some point it will reach double digits as it did in 2009-10. At that point interest rates will have to go up with concomitant increase in bond yields and bond holders will suffer losses. High inflation affects currency negatively so bondholders will see the value of their investments falling in real terms. Though the rupee is currently trading at around Rs 73 to the dollar it could fall if economic growth remains weak along with high inflation. Inflation helps the government reduce its debt by increasing tax collections on higher priced goods, increased income tax collection on rising wages and by reducing the value of the currency. But high prices are disastrous for the poor because they suffer a severe reduction in what they can buy. "Price stability is a goal too worthy to give up on," wrote an editorial in the Mint. The RBI, and its governor, have to decide if they are here to serve the people or the government. If its sole function is to serve the government let us "shed the make-believe" and get rid of the RBI. That will at least save an awful lot of money.