With just a month to go before he retires,
Reserve Bank of India (RBI) Governor D Subbarao has increasingly been making an effort to defend his record in office. In Chennai on Thursday (August 1) to deliver the fifth R. Venkatraman Endowment Lecture at the Madras School of Economics, on 'Dilemmas in Central Banking', he used the occasion to respond to charges made by his critics.
The most serious of them is that the central bank has
stifled growth by raising interest rates sharply (13 times across 2010 and 2011) and still failed to rein in inflation. "That is not true. Inflation has come down as measured by the Wholesale Price Index from double digit levels to less than five per cent," he said. "Also, the question we need to ask is: where will the inflation and growth have been today had RBI not increased the interest rates," he said. Inflation, Subbarao added, could not be controlled without sacrificing growth, but the sacrifice was only temporary. "An environment of low and steady inflation is important for investors and this actually helps growth," he pointed out.
The RBI believes in price stability, growth and financial stability. Dilemmas arise in attempting to strike a balance between these three critical objectives. A low interest rate is critical for growth, but to stop inflation from rearing its head, a high interest rate regime is critical. How you manage that is a challenge any central banker faces, Subbarao said.
Blog: In Defence of D. Subbarao Inflation is a regressive tax and it hurts the poor the most, he pointed out. While industry can air its views about the need for growth through the media, the voices of the poor are seldom heard. It is the RBI's responsibility to be sensitive to the silence of the poor, he added.
Explaining the clamour for high growth rates (even if it stokes inflation), governor noted that prior to the global financial crisis, the Indian economy had been registering high growth rates. The economy grew by an average of 8.7 per cent in the 2004 to 2008 period compared to the Hindu rate of growth of 3.5 per cent in the 1950 to 1980 period. "High growth rates raised aspirations and India came to be seen as the most promising economy in the world," he said. The global financial crisis and failure of the decoupling theory which said that emerging economies were insulated from the financial problems of developed countries, meant that India's dream run ended. Today, Subbarao said, the country faces a very difficult macro-economic situation. Growth has moderated. It was five per cent last year - lowest in the last 10 years. Inflation has risen, the current account deficit has widened to record levels, balance of payments is under stress and investment in the economy has decelerated.
Subbarao's mantra to turn RBI into a knowledge hub He also responded to the most recent criticism of the measures the central bank had employed to suck liquidity from the banking system to control rupee volatility. In the last one month the RBI has been at its wits' end to control the rupee's slide against the US dollar, triggered by external developments. On July 15 and again on July 23 it took measures to raise the price of money and tighten liquidity in the monetary system. "Rupee volatility hurts investor sentiment and consequently economic growth. Though conditions were conducive for monetary easing during the credit policy review on Tuesday, we could not reduce rates before curbing the volatility of the rupee," Subbarao explained. "We are not targeting any particular value for the rupee. We only want to smoothen the movement."
He further said that RBI was attacked for not being more specific as to when it will
roll back the recent measures to suck liquidity from the system. "We were very clear we did not want to put in a time frame as the roll back was data dependent. Otherwise we will confuse the market," he said.
Subbarao will retire early September after about five years at the helm of the central bank - a difficult period where he had to steer the apex bank through the fallout of the global financial crisis, runaway inflation in India and a slowing economy.
Reserve Bank of India (RBI) Governor D Subbarao 
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