With Bold Moves, Subbarao Gets Reddy for Criticism

In his Predecessor's Steps: RBI guv has earned more critics than admirers in the past few months

When career bureaucrat Duvvuri Subbarao took the wheel at Mint Street in September 2008 at a time the financial world was crumbling, the popular belief was New Delhi would get a firm handle on monetary policy. The Lehman Brothers collapse and the 'synchronised' handling of the crisis between the government and central bank strengthened the belief. Three years later and the next crisis possibly round the corner, the story is different. Subbarao has earned more critics in recent months for supposedly killing growth, but a few admirers too for his conviction. Events are unfolding to create a landscape similar to the one that confronted his predecessor Yaga Venugopal Reddy — heaps of criticism for supposedly stifling growth and innovation. 
"It was unnecessary given the sharp deterioration in the global environment and a significant slowdown in domestic activity," said Tushar Poddar of Goldman Sachs after the governor raised policy rates 25 basis points last Friday amid slowing economic growth. A basis point is 0.01 percentage point. 
Industry was not far behind. 
"At a time economic policy should focus on the creation of jobs, it is unfortunate that the economy is being forced into a sluggish growth phase," said B Muthuraman, president, Confederation of Indian Industry. 
Subbarao, who parroted the policy stance of global central bankers during much of his first term, is deviating significantly. Policymakers in developed nations are keeping rates near zero and Federal Reserve Chairman Ben Bernanke has promised to keep it low till the middle of 2013. Most Asian central bankers have left rates untouched this month and Turkey and Brazil have cut interest rates. Subbarao is the odd man out by promising to keep raising rates till prices cool. Many admire his independence. "Subbarao is a pragmatic and astute central banker who has taken independent decisions based on his well-researched conviction," says Madan Sabnavis, chief economist at rating company Care. Warrior Caught in Padmavyuha
"He has recognised inflation as being the single most important malaise afflicting the economy and pursued the goal of increasing rates, notwithstanding the pressures being exercised from different quarters, displaying a lot of character." 
Industry has been seeking a halt to raising interest rates, which started with 'baby steps' in 2010 with the governor's public admission of confusion with reference to his position being similar to a warrior caught in 'padmavyuha', a battle formation that is easier to get in, but difficult to get out. 
The noise was loud enough to force him to declare last November that he would be putting the brakes on rate increases as manufacturing data showed weakness despite climbing prices. Industry and markets cheered, but it was short-lived. 
He abandoned the baby steps for a shock treatment by raising rates 50 basis points in July, double of what the market forecast. "What the RBI will have to consider is that interest rate tightening has not had the desired impact on inflation that we were hoping for. It is having an impact on growth," Kaushik Basu, chief economic advisor to the finance minister, said before the rate hike decision last week. 
The wildly-fluctuating Index of Industrial Production was presented as an argument for a pause. But Subbarao began to dig the surface. The economist in him found that data from the government was unreliable. A new series that was peddled by the government statistics department to be more reliable has been described by the governor as 'analytically bewildering'. 
ASSERTING RBI'S AUTONOMY 
It is not just his monetary policy actions by which Subbarao has asserted the central bank's autonomy. He has spoken out in public on some controversial issues such as the government's inability to rein in fiscal deficit, criticising banks that sold derivatives to unsuspecting customers and steadfastly resisting demands for investing foreign exchange reserves to build infrastructure. 
He has spoken out on other matters as well. "The establishment of a statutory joint committee is itself problematic and raises issues about its potential misuse in ways that impair the autonomy of the regulators," Subbarao wrote to Mukherjee expressing his reservations about setting up a council headed by the finance minister to reconcile differences between regulators. But on this, the government ultimately had its way. Monetary authorities, in an unwritten rule, do not comment often about government finances. But in the last few months when criticism mounted on the RBI for raising rates, Subbarao said the government was not helping much to contain prices. In effect, saying that those in glass houses shouldn't throw stones at others. "Beyond the short term, the threat to the independence of central banks emanates from factors apart from public anger... as countries contemplate exit from these expansionary policies, the familiar tensions between monetary and fiscal policies are showing up again," he had said. "Many believe that these tensions are temporary, and will melt away once recovery takes root... that may not well be the case." 
INCREASING TRANSPARENCY 
Transparency is probably a word that does not exist in a central bank's dictionary. The RBI is probably as opaque as most central banks, but Subbarao has taken 'baby steps'. One example is the decision to make public the minutes of the technical advisory committee meeting. It probably may not be as significant as it is in the West due to non-voting nature of the members, but it has helped in at least one way — to show Subbarao does not hesitate to differ. Twice he has gone against the majority view of the advisory committee. The steps towards greater transparency are not surprising given his agenda all along has been "to improve communication" and "de-mystify the office of the governor". 
"Since this governor has taken charge, the language in the policy statements has acquired much greater clarity as has the guidance for future policy actions," says Jahangir Aziz, Asia economist, JPMorgan Chase. 
Ever since taking charge of monetary policy, he knew part of his job was to hold a mirror to the government. "The central bank has performed the role of being an effective counterpoint to the government, which often has to concentrate on short-term objectives," he had said. "The Reserve Bank has been able to take a medium-term view and what is prudent and optimal comes out of this synthesis. We should continue to do that."