It’s Not All Depreciation

Subbu’s Report Card

Global financial crisis After initial hesitation, the governor moved quickly to cut interest rates, ensured that growth was sustained and that investments continued

Inflation Razor-sharp focus on controlling high inflation; despite intense pressure from government, maintained high interest rates

Growth With the economy showing signs of slowing down, it was only in January 2013 that the central bank first cut interest rates to boost growth, and that too marginally

Rupee After initially ignoring it, the falling rupee seems to have spooked the RBI; its moves to stem volatility have been attacked

Regulating RBI Like his predecessors, took up cudgels with the finance ministry to safeguard the central bank’s role

“It was thanks to some bold RBI decisions that the banking system didn’t falter during the global financial crisis.”

Dr Ajit Ranade
Chief economist, AV Birla group

“The RBI’s role is now monitorist, in terms of inflation targets.... He carries the fiscal profligacy cross but has no control over the fisc.”

N.K. Singh
Economist and Rajya Sabha member

“The real control today is fiscal policy and for fiscal management you have Mrs Gandhi who wants to spend like there’s no tomorrow.”

Dr S.L. Rao
Former NCAER director-general

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Is outgoing Reserve Bank of India governor Duvvuri Subbarao being judged a tad harshly at the end of his five-year tenure? It certainly seems so. Around the time Union finance minister P. Chidambaram—who allegedly had a tetchy relationship with the RBI chief on monetary policy­—confirmed that the top banker is keen to “move on”, economist Prof Arvind Panagariya weighed  in, rating Subbarao as the worst RBI governor. It’s a questionable assessm­ent, say many experts Outlook spoke to.

While not wholeheartedly in support of the outgoing governor (he retires on September 5, when Raghuram Rajan takes charge), they give full marks to Subbarao for withstanding the press­ures of the global financial crisis. It was a baptism by fire. The collapse of US inv­estment bank Leh­man Brothers Holdings Inc within a fortnight of his taking charge presented the biggest challenge—to ensure that Indian banks did not collapse like their western counterparts.

“It was thanks to some bold decisions and deft management of monetary policy that the banking system did not falter and we were able to withstand the effect of a once-in-a-century financial crisis,” says Dr Ajit Ranade, chief economist, AV Birla group, who has reservations about some of the RBI’s policy moves on the rupee and interest rates this year but overall ranks the outgoing governor quite high.

Many credit Subbarao for the management of the crisis period during which he cut interest rates by 2.5 per cent in a matter of weeks to 6.5 per cent and released a total of Rs 1,00,000 crore into the cash-starved banking sector, ensuring India remained insulated from any adverse global weather. “While not giving full marks, I appreciate the ext­r­emely difficult context in which Sub­b­a­rao played the role of India’s chief money man,” says Tamal Bandhopa­dhyay, deputy man­aging editor at Mint.

It was the scourge of inflation, particularly high food inflation, which saw the RBI governor raise the policy rate a rec­ord 13 times over an 18-month per­iod starting from March 2011. Taming inflation has not proved an easy task with not just domestic but also global factors pla­y­ing out. “Arvind (Panagariya) belie­ves the interest rates were hiked up in a knee-jerk, untimely manner in a period of 18 months and therefore growth was stymied. I think it was a calibrated resp­o­nse under the constraints,” says economist and RS member N.K. Singh.

Now economic advisor to the Bihar government, he blames the “unsustainable fiscal profligacy” of the governm­ent for the current state of the economy. Indeed, the UPA is a fine one to blame the RBI governor for the economy’s woes. It sou­ght to dilute the powers of the central bank as recommended by the Financial Sector Legislative Reforms Commi­ss­ion’s (FSLRC) report, which seeks to rewrite financial laws. The changes proposed are dramatic: a super-regulator, the Financial Sta­b­ility and Devel­o­p­ment Council, headed by the FM,  and a monetary policy committee with five independent external members selected by GoI to oversee the central bank.

Subbarao, like his predecessor Dr Y.V. Reddy, strongly opposed both moves. The issue is still not settled. “He has been his own man and defended what the RBI stood for and did not give in to finance ministry pressures,” says Abh­eek Barua, chief economist, hdfc Bank. There has been consistent pressure on the central bank to shift focus from inflation management to boosting gro­wth through cuts in the interest rate.

The fact that the non-food inflation rate has come down to targeted levels of five per cent and even food inflation is now in single digits is thanks to Sub­barao’s policies, say economists. They stress that some of the consistent and high inflationary pressures came from the government’s fiscal stand and the supply side mismanagement—as in the case of pulses, edible oil, cer­e­als—and also failure to check pro­f­iteering by suppliers at various levels.

Just when inflationary pressures were coming under control and the RBI seemed ready to lower interest rates—which was expected to boost investor sentiments—a fast depreciating rupee played spoilsport. With the US Fed proposing to withdraw its growth stimulus, attempts to check the rupee slide have not worked. The rupee slipped to an all-time low of  Rs 61.79 this week before recovering slightly.

Subbarao came in for some criticism because the RBI measures to stem volatility in the rupee have not yielded desired results. Ila Patnaik of nipfp hints at “political pressure” in some of the decisi­ons taken and the consequent confusion caused by the handling of the rupee.

“To call the RBI governor best or worst shows lack of knowledge and headline- grabbing tendencies. Or it could be a personal agenda...comments like these may also be designed to absolve the ruling political party and ministers who are actually responsible for the current mess,” says Debashis Basu, editor, Money Life. Basu’s contention is that the RBI governor cannot manage out-of-his-purview issues like budgeted expenditure, the government’s revenue generation, business-unfriendly decisions and petty corruption that hinder business growth or the large-scale corruption that leads to wastage and wrong incentives.

All these factors affect business efficiency, export competitiveness, rupee value, inflation, interest rates and stock prices. “Once these six factors are headed the wrong way, the RBI, under any governor, can do little,” adds Basu.

While Subbarao followed several of the RBI’s traditional positions (including in dealings with the government), unlike his illustrious predecessors, Subbarao didn’t have the same kind of support wit­hin. For instance, Bimal Jalan had Y.V. Reddy with him; Reddy had Dr Rakesh Mohan but Subbarao did not have anybody of that stature with him to decide on the monetary policy trajectory.

To top it, as Patnaik puts it, the RBI is not independent and has been under a lot of pressure. This could be one reason why some conflicting signals have been emanating from the central bank. But that does not dilute the stellar role played by Subbarao in steering India through a period of global crisis.