Is Subbarao really one of the worst RBI governors?

Towards the fag end of his career, RBI Governor D Subbarao is drawing flak for a wobbly monetary policy management over the last five years.

In an interview to The Indian Express Editor-in-Chief Shekhar Gupta, Arvind Panagariya, professor of economics at Columbia University, has termed Subbarao’s tenure as “one of the worst in the history of the bank”.

“I am afraid…this is one of the worst eras of performance by the RBI governor,” he said in the interview.

He has said Subbarao’s actions added to the break in growth momentum that Jairam Ramesh’s stint as the environment minister and Jayanti Natarajan’s present stay in the same ministry has brought about.

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[caption id=“attachment_986139” align=“alignleft” width=“380”] Calling Subbarao one of the worst RBI governors may not be fair. After all, he was utilising the limited monetary policy tools in his kitty. Measures to bring about fiscal correction and to resolve supply-side issues are to be taken by the government. AFP[/caption]

Subbarao’s big mistake was the increase in interest rates that the central bank had affected during the 2009-10, when the rupee was appreciating. That was a time when it should have amassed the foreign exchange reserves, which could have been of help in supporting the rupee now.

Instead of doing this, Subbarao increased the interest rates and forced Indian companies to go abroad to raise funds.

“In a way, this new policy started with the current RBI Governor. I am sorry to say, but the timing connects to his tenure. His public pronouncements suggest to me that he really stands behind this policy,” Panagariya has been quoted as saying.

The comments come at a time when the RBI is doing its level best to stave off a policy rate increase. Towards this end, the central bank has squeezed cash in the banking system, effectively raising the short-term rates in the economy.

Many economists have termed the RBI’s measures text book economics and warned that this will reduce the economic growth this year.

“Credit quality of corporates is likely to be weakened by slow growth in GDP, heightened currency volatility, and higher-than-expected interest rates. Specifically, stress will increase in sectors such as power, construction, engineering, and steel, and lead to higher non-performing assets (NPAs) in the banking system,” Crisil said in a press release today.

The rating agency has cut the country’s growth target for this year to 5.5 percent from earlier 6 percent as it doesn’t expect the RBI to cut rates anytime soon.

“Finding the right balance between growth and inflation is sure tricky, but it’s an art Subbarao has failed to master after five years in office,” Sanju Verma, Group CEO, Violet Arch Securities, had said in a recent article in DNA.

According to Sanju, the pace with which Subbarao initially cut rates by 425 bps and subsequently raised them by 375 bps has been “unsettling”.

But just how fair is it to dub Subbarao a bad or worse RBI governor? Not very, because you can’t blame only Subbarao for the decisions he took at that time.

True, he was on a rate increasing binge from March 2010 to October 2011. But the reason for this was concerns that inflation may rise due to higher demand.

“Inflation and inflationary expectations remain high as both demand side and supply side factors are at play. Given the spread and persistence of inflation, demand-side inflationary pressures need to be contained and inflationary expectations anchored,” the RBI had said in the policy review on 2 November 2010, by which time it had raised policy rates by 150 basis points.

The increased demand was mainly due to the huge lacunae in the government’s welfare schemes like MGNREGA.

So, calling Subbarao one of the worst RBI governors may not be fair. After all, he was utilising the limited monetary policy tools in his kitty. Measures to bring about fiscal correction and to resolve supply-side issues are to be taken by the government.