Duvvuri Subbarao, in his last public lecture as the chief of the central bank, took the Government head-on, on a host of issues and also took a dig at Finance Minister P. Chidambaram.

Delivering the 10th Annual Nani Palkhivala Memorial lecture, Subbarao said that to attribute moderation in growth to the central bank’s tight monetary policy would be “inaccurate, unfair and importantly misleading as a policy lesson.”

India’s economic activity slowed owing to a host of supply-side constraints and governance issues, clearly beyond the purview of the Reserve Bank, he said.

“Critics of our monetary tightening must also note that our degrees of freedom were curtailed by the loose fiscal stance of the Government during 2009-12. Had the fiscal consolidation been faster, it is possible that monetary policy calibration could have been less tight,” he said.

The Governor said he does not agree with the criticism that the Reserve Bank failed to control inflation but ended up stifling growth. “If the Reserve Bank’s repo rate was the only factor inhibiting growth, growth should have responded to our rate cuts of 125 basis points between April 2012 and May 2013, cash reserve ratio cut of 200 basis points and open market operations of Rs 1.5-lakh crore last year,” he said.

Subbarao admitted that in hindsight he feels the economy would have been better served if the monetary policy tightening after the global financial crisis had been “faster, sooner and more pronounced.”

However, he was quick to point out that central banks have to act in real time, based on the facts and figures available to them at that time.

He also said that going ahead the RBI should focus on communicating better with the markets. “People tell that markets are misbehaving. I think that we should not tell the markets how to behave. We should take the market behaviour as a given and try to communicate our policies better with the markets,” the Governor said.

Autonomy

He said that besides its regular role, the RBI also “services” the Finance Minister in answering Parliament questions relating to its domain.

“Most importantly, the Governor appears before the Parliament’s Standing Committee on Finance whenever summoned, which happens on the average three-four times a year,” he said.

He said these mechanisms for accountability are both inadequate and unstructured.

“Perhaps, we should institute an arrangement whereby the Governor goes before the Parliament Standing Committee on Finance twice a year to present a report on the Reserve Bank’s policies and outcomes and answer questions from the members of the Committee.

“This will not only secure the accountability structure but also protect the Reserve Bank from any potential assaults on its autonomy,” he said.

On the simmering issue in the media over policy differences between the Government and the Reserve Bank, Governor Subbarao took a dig on Finance Minister P. Chidambaram.

“I do hope Finance Minister Chidambaram will one day say, ‘I am often frustrated by the Reserve Bank, so frustrated that I want to go for a walk, even if I have to walk alone. But thank God, the Reserve Bank exists’.”

A few months back, referring to the RBI’s tight monetary policy stance, the Finance Minister had said that if the Government has to walk on the path of growth alone, it will do so.

satyanarayan.iyer@thehindu.co.in

beena.parmar@thehindu.co.in

(This article was published on August 29, 2013)
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