Not his master’s voice

Raghuvir Srinivasan
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There is something that the Reserve Bank of India does to those who head it — it imbues them with an independent, autonomous streak. When Duvvuri Subbarao assumed the office of Governor at the Reserve Bank of India (RBI) in September 2008, the talk was that he was North Block’s man sent to tame the central bank after a period of stubborn independence under the redoubtable Y.V. Reddy. Yet, five years hence, as he hangs up his boots today, Dr. Subbarao has not just disproved those assumptions but has actually scripted his own chapter of autonomous central banking by standing up to his political masters on different occasions over different issues.

His was not an easy term. The hazards do come with the position. Yet, even by that yardstick, Dr. Subbarao’s five years at the helm of the RBI were remarkable for the challenges that he had to face and the pressures that he had to endure from North Block and India Inc. He ran headlong into the credit markets freeze following the collapse of Lehman Brothers, which was within a few days of his assumption of office. Ergo, he cut rates in his very first policy statement in October 2008 and followed quickly with more cuts as the repo rate fell from nine per cent in July 2008 to 5.50 per cent in January 2009. Alongside, Dr. Subbarao eased up on the cash reserve ratio infusing much-needed liquidity to stave off a crisis even though he and the RBI knew that there would be a price to pay down the line in the form of inflation.

Within the next one year the inflation monster started rearing its head. With massive amounts of money sloshing around the world financial system as central banks unleashed liquidity, India started experiencing huge capital inflows into its markets. The challenge was now to change tack to tightening rates. There are some who believe that Dr. Subbarao was behind the curve in changing direction which in turn led to inflation rising to unsustainable levels in 2010 and continuing to rage through 2011 despite the central bank reversing its easy money policy.

Interestingly enough, there are others who fault the Governor for tightening rates and presiding over a downturn in growth when inflation was largely due to supply-side factors not in the control of RBI’s monetary policy. This debate only highlights the dilemma of monetary policy, something that Dr. Subbarao acknowledged in the Tenth Nani Palkhivala Memorial Lecture on August 29, his last public speech as Governor.

To be fair to Dr. Subbarao, the RBI cannot be blamed for the mess that the economy now finds itself in. The central bank often found itself handicapped by the lack of support from North Block which was running a loose fiscal policy encouraged by the massive capital inflows into the economy. Economic policy-making is a bit like an orchestra in which the two main players, RBI and North Block, must make beautiful music together on separate instruments. When one plays out of tune, as the Finance Ministry did for much of the last five years, what emerges is cacophony. This is what Dr. Subbarao was hinting at in his last few monetary policy pronouncements and spoke openly about at the Palkhivala lecture.

He did not shy away from pointing out, on more than one occasion, about the unreliability of key data emanating from the government which form the basis of monetary policy. The reported number of Index of Industrial Production has been adjusted more than once in recent times to reflect corrections. His biggest fight though was reserved for the role of the RBI in the light of the recommendations of the Financial Sector Legislative Reforms Commission which argued that the central bank should restrict itself to conducting monetary policy.

Dr. Subbarao was a strong votary of a “full-service central bank”, one which is responsible not just for price stability but also financial stability and sovereign debt management. Indeed, the measures of the last few weeks following turbulence in the forex market reflect the full breadth of the RBI’s functions. The Governor has, rightly, linked the issue to the autonomy of the central bank and its wider mandate compared to other central banks. To him, the Lehman crisis proves the need for a strong central bank with a wide mandate.

One often got the impression that Dr. Subbarao brought his basic learning in physics (he’s an M.Sc. in Physics from IIT Kanpur) to bear in his understanding of financial markets which work to laws not too unlike those of quantum mechanics. To him the numerous participants and the interplay among them in the market were very similar to that among sub-atomic particles. Post-retirement he should probably write a book on this.

The legacy and performance of a central banker is best judged not when he’s in the saddle but much after he lays down office. Mr. Y.V. Reddy was pilloried when he was Governor; today he’s being praised for astute central banking and is a much sought after public speaker. On the other hand, Alan Greenspan was the darling of the markets when at the helm of the Federal Reserve. When the credit crisis hit the market though, he was blamed for having sown its seeds.

The true legacy of Dr. Subbarao will be realised similarly down the line. But this much needs to be said: over the years the grand old lady of Mint Street has been wooed by several powerful suitors from Delhi. And she turned them all down. Dr. Subbarao sustained that legacy even if at times it required him to tell some of those suitors to take a walk, all alone. That shall remain his biggest accomplishment.

Duvvuri Subbarao’s biggest accomplishment was sustaining the RBI’s legacy of independence



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