Money & Banking

Tight policy may have deepened slowdown, says Subbarao

VINSON KURIAN Thiruvananthapuram | Updated on March 12, 2018 Published on August 14, 2012

Reserve Bank of India Governor D. Subbarao (File Photo)

Reserve Bank Governor D. Subbarao has said that the tight monetary stance may have contributed to the general slowdown and waning investment cycle.

“Some analysts blame the global crisis for all of India’s ills. But there are also domestic factors at work,” he said during the course of invited lecture hosted here by the Kerala Planning Board.


“Firstly, the tight RBI policy stance. Secondly, the issue of infrastructural bottlenecks. Third, the lagging economic and governance reforms and governance issues affecting the investment sentiments,” D. Subbarao said.

The big difference from 2008-09 and now is that the policy space is much lesser. Inflation had come down drastically during that period and oil prices plummeted, and the external sector was robust.

Today, the situation is drastically the opposite. Inflation is high, oil prices are refusing to come down, and there’s lot of stress on the external sector, D. Subbarao added

So we are vulnerable to what is happening around globally – which is another round of slowdown.


Globalisation is a double-edged sword. It threw up lots of opportunities in 2003 to 2008; but it has delivered ruthless challenges during the crisis period.

In 2003-08, we prospered due to better integration with the rest of the world, but are taking a hit during the latter period because of this integration, he said.

Fiscal deficit, current account deficit and declining investments do not leave any space for fiscal stimulus.

On exchange rate, the Governor said that the Reserve Bank would like to see that its intervention in the market is credible and effective.

Failure in the bid to defend currency is worse than no defence at all, he added.


Capital control has been a contentious issue. Post 2008-09, even the IMF has said that emerging market economies (EMEs) may intervene in their market if particular circumstances warranted so.

But today, one can see advanced countries doing it as in Japan or Switzerland, the Governor said. They would defend currencies for expected favourable impact on competitiveness, asset prices and financial stability.

The US does not always say it is targeting the currency but quantitative easing (printing of money) debases dollar.

Depreciation of currency is self-correcting, at least in theory, but that does not happen in India because of several distortions in the market, D. Subbarao said.

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Published on August 14, 2012
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