Each time the RBI Governor takes the stage to give us the latest bad news on the economy and interest rates, the air becomes thick with avian metaphors. When a journalist said, “The policy action is hawkish but the guidance is dovish. So is not the guidance anti-inflationary?”, he drolly replied: “We are neither hawks nor doves but actually owls.”
If figuring out this exchange is giving you a mild headache, maybe you’d like to know more about how central bankers came to acquire feathered friends.
What are they?
Policymakers are tagged as hawks or doves depending on how aggressive they are in dealing with the challenges they face. Like the predatory hawk which swoops down on its unsuspecting prey, hawkish policymakers like to go on the offensive to tackle a problem. They favour the Wild West approach — shoot and then ask questions.
Dovish policymakers, on the other hand, are more peace-loving and prefer coaxing the enemy into submission. This terminology which originated in the military has now found its way into the world of money and finance.
Coming to monetary policy, inflation hawks aggressively pursue the goal of keeping inflation in check by ruthlessly subduing it with high interest rates (more on this later).
The doves, on the other hand, have a more benign view on inflation. They argue that if you keep rates low, companies will borrow more, put up more manufacturing units, produce more goods and services. Thus, supply will eventually catch up with demand, reducing inflation.
Why are they important?
It’s these birds that call the shots when it comes to the big macroeconomic decisions that affect a country and its people. Let’s take the case of the RBI.
Suppose the RBI is hawkish — believes that inflation is a worry. What does it do? It promptly increases the repo rate, the rate at which banks borrow money from the RBI. Banks in turn try recovering this increase in cost from their customers in the form of higher loan rates. This works towards reducing people’s spending — people take fewer loans and buy fewer homes, cars and other things. As consumption falls, it helps soothe prices. Remember the textbook definition of inflation: too much money chasing too few goods. So, if you can’t produce more goods quickly, the next best thing to do is to make people buy fewer goods.
Why should I care?
You’ve been planning to buy a home for some time now and intend taking a bank loan for it. But, you might just have to do a rethink if the RBI is in a hawkish mood. For if you take on that loan now, your EMIs (equated monthly instalments) may soon head north as the RBI hikes interest rates. But if you, like Uncle Scrooge, save up all your money in bank deposits, you may love a hawkish RBI. As interest rates climb, you get a better return on your deposits.
Likewise, if the government is full of hawks, then you may just have to prepare yourself for higher taxes and lower subsidies. But a dovish government is all for splurging on cheap petrol and freebies to stimulate the economy. So, you’d be glad to know that more often than not governments have erred on the side of being dovish rather than hawkish.
The bottomline
Actions speak louder than words. So don’t try to figure out whether the RBI is a hawk or a dove from what it is saying in its statements. As long as the Guv is raising rates, he’s a hawk, though he may be quite good at charming everyone into thinking he’s a dove.