Goodbye, Dr. Subbarao! You Steered Through the Turbulent Times Pretty Laudably

When D. Subbarao took over as the 22^nd Governor of the Reserve Bank of India—replacing YV Reddy, who by then had exhibited an unacceptable quantum of independence to the chagrin of the government—initially, for a three-year term,  in September, 2008, the press was agog with the gossip that at last North Block could plant one of its henchmen from the bureaucracy in the monetary citadel to dance to its piped music.

Against this general perception, immediately after assuming the Governorship, Subbarao had to face the global credit markets freeze—the aftermath of Lehman Brothers collapse. In his very first policy statement in October 2008, he had to therefore cut policy interest rates, followed by more such cuts; indeed, he came up with aggressive policy initiatives—reducing repo rate by 425 basis points to 4.75%, reverse repo rate by 275 basis points to 3.25%, and the CRR by 400 basis points to 5% by August 2009—all to supplement the liquidity in the crisis-ridden system so as to maintain a conducive environment for the smooth flow of credit to all the productive sectors of economy and ensure that the global financial crisis will have the least impact on our growth.

But this had its own downside, that too, when the much sought growth was not taking place. The result was: within a year, the inflation monster started rearing its head. Simultaneously, as global central bankers practiced unconventional monetary easing, India witnessed huge foreign capital inflows—stock market was awash with dollars, making the scene further murky. All this compelled the Governor to change his tack—must tighten the interest rates. He did change the course, but there are critics today who say that he was behind the curve that changed the course. But the argument was: in balancing the growth and inflation, such delays, which become clearer on hindsight, tend to creep in. Whatever might be the argument, since then, he has been tightening interest rates.

That said, one must also appreciate the reality of the tricky situation: the Governor had to “maintain the accommodative monetary stance till demand conditions further improve and the credit flow takes hold; improve the investment climate and expand the absorptive capacity of the economy, and be ready with a road map to reverse the expansionary stance quickly and effectively well before inflationary pressure builds up in the system”, which could only be accomplished, if at all, by effective coordination between fiscal policy and monetary policy. Alas! The Central Bank was always handicapped by the lack of support from the finance ministry as it preferred loose fiscal policy aided by hefty inflows of foreign capital.Yet, he remained hawkish in reining in inflation all through. And he made his stand amply clear by saying in one of his recent public addresses: “The Reserve Bank is committed to inflation control, not because it does not care for growth, but because it does care for growth. There is any amount of evidence to show that an evidence to show that an environment of low and stable inflation is a necessary precondition for sustainable growth.”

That aside, as he was tightening the interest rates, India Inc was obviously, up against the Governor for derailing the growth by raising the interest rates 13 times in a row, that too, when the inflation was more due to supply-side constraints that is anyway outside the scope of the RBI. But Subbarao stood his ground as was revealed, for instance,  by what he said while reviewing the monetary policy for the second quarter of the financial year 2012-13: “…recent policy announcements [by the government]…that have positively impacted sentiment, need to be translated into effective action to convert sentiment into concrete investment decisions”, and his assertion that “a rate cut at this time may dilute RBI’s anti-inflationary stance”. Instead, he cut the Cash Reserve Ratio (CRR)—the portion of deposit that banks are mandated to maintain with it, with no interest earning—by 25 basis points, bringing it down to 4.25%, whereby RBI could make an additional Rs. 17,500 crore available to the banking system for undertaking fresh lending and also to enable banks to cut lending rates owing to easing of liquidity constraints.  

Even otherwise, isn’t it the job of the government to give a boost to growth by reducing fiscal deficit, putting in place necessary reforms that improve investor sentiments, and working towards debottlenecking the supply side bottlenecks with “animal spirits”?

There is also another criticism against Subbarao that he didn’t sterilize huge Forex inflows when the rupee was appreciating sharply, and instead allowed companies to borrow left and right from the global markets. Here again, one should bear in mind that the government too has its own role in defining the exchange rate policy. Indeed, on one occasion, the Finance Minister said that the government aims to bring down the CAD from 4.8% of GDP in 2012-13 to 3.7% in 2013-14 by bringing down the CAD to $70 billion, which, incidentally implies that it would be brought down more by financing than by reducing it.

Coming to the current steep fall in the Rupee value and its handling by the RBI,some economists argued that the RBI should not have defended the rupee by tightening the liquidity in the market, for they opined that “Indian economy had lost competitiveness due to an appreciation of the real effective exchange rate of the rupee.”  They also argued that such knee-jerk reactions of the RBI had only weakened the investor confidence in India’s ability to manage the macro-economy. But then, frankly speaking, does the RBI have any choice but to practice the textbook measures to try and break the expectations of the market that were mounting up around the currency?

Dr.Subbarao was equally vociferous when it came to the recommendations of the Financial Sector Reforms Commission that the central bank should restrict itself to conducting monetary policy. He argued for the role of the central bank in ensuring not only price stability but also financial stability. Even while calling for applications to grant fresh licenses for establishing banks, he stood his ground. He never hesitated to air his opinion on the unreliability of key data emanating from the government that the RBI has to rely on while drafting its monetary policy. Such was his independent stance even with regard to policy matters.

That being his journey, as he hangs up his boots today, Dr. Subbarao could look back with pleasure at the independent path that he had trodden all along so arduously which had seen him through five long economically turbulent years, yet coming up with a fair performance—which, no doubt, at times caused so much consternation to the government that it felt like walking all alone to accomplish growth—as the Governor of the RBI, which the posterity will surely better appreciate.