Sign up for Equitymaster's free daily newsletter, The 5 Minute WrapUp and get access to our latest Multibagger guide (2017 Edition) on picking money-making stocks.

This is an entirely free service. No payments are to be made.

Download Now Subscribe to our free daily e-letter, The 5 Minute WrapUp and get this complimentary report.
We hate spam as much as you do. Check out our Privacy Policy and Terms Of Use.
Subbarao, take a bow - Outside View by S.S. TARAPORE
Subbarao, take a bow

In less than two weeks, D. Subbarao will be laying down office as Governor, Reserve Bank of India (RBI). At the start of his tenure and towards the end, there have been severe problems.

He has heroically led the RBI with maturity and judgment, despite being aware that he would be pilloried by the government and others who survive on government patronage.

Subbarao can take comfort in the fact that, at some point of time, each of his predecessors in the past thirty years has been vilified, only to be recognised that they were the saviours.

Unwarranted Attack

Arvind Panagariya, Professor of Economics at Columbia University, brashly sums up that Subbarao's tenure is "one of the worst eras of performance by the RBI Governor". He goes on to blame Governor Subbarao for not building up forex reserves when the rupee was appreciating sharply in 2009-10 and instead allowing Indian companies to borrow abroad.

Panagariya berates Governor Subbarao for raising interest rates on 13 consecutive times and that Governor Subbarao's public pronouncements suggests that he stands behind this policy. Drawing a timeline of real growth, inflation, forex reserves and the balance of payments current account deficit (CAD) for each Governor's era is totally meaningless unless it is contextualised in the overall domestic and international environment.

Panagariya shows a total unawareness of the political economy of the formulation of monetary and exchange rate policies. The fact that the government holds sway over policy formulation needs to be appreciated. Panagariya's criticism of Governor Subbarao is uninformed, unreasoned and unwarranted. Panagariya has to familiarise himself with the process of macroeconomic policy formulation in India before coming to any reasoned judgement on a Governor's era.

Forex Intervention

The viewpoint that the RBI should have increased its forex reserves when the rupee was appreciating has been raised by Indian analysts and opinion makers.

Panagariya should surely know that the government has an overarching role in the formulation of forex market policy. Again, the government is not a mere bystander in the formulation of interest rate and the stance of monetary tightening or easing.

The Finance Minister has indicated that the target would be to bring down the CAD from 4.8 per cent of GDP in 2012-13 to 3.7 per cent in 2013-14 with a red line at a total CAD of $70 billion. Much of the talk has been about financing and not the reduction of the CAD.

The exchange rate is an important component in attaining this target. Banning imports does not reduce the CAD.

Growth-Inflation Balance

The Finance Minister has unequivocally said that RBI's mandate is just not price stability but growth and employment.

Then there is no pressure on fiscal policy for financial stability, growth and employment. This sort of shifting the blame to RBI is totally counterproductive.

Added to this, the Prime Minister has called for evolving fresh thinking on RBI's monetary policy in a globalised environment.

What is intriguing is that the Prime Minister has invoked the Sukhamoy Chakravarty Committee Report on the Monetary System (1985) which focused on rationalisation of monetary controls and called for monetary targeting with feedback.

One is afraid that foreign investors could misconstrue this reference to mean that one should go back to the controls of the 1980s.

Governor Subbarao in a spirited defence has argued that the contention that the RBI is obsessed with inflation, oblivious of growth concerns is both inaccurate and unfair. He argues that RBI is committed to inflation control, not because it does not care for growth but because it does care for growth.

The Issue of Gold

I have said this earlier and I would unhesitatingly reiterate it, that one of Governor Subbarao's outstanding achievements is to have boldly bought 200 tonnes of gold to diversify the forex reserves. Governor Subbarao is being savagely attacked for having kept interest rates too high. Given the inflation rate, key interest rates are negative and lowering interest rates further would only reduce financial savings and thereby widen the CAD.

Unreconstructed optimists who have an overwhelming say in policy formulation, supported by large industry and financial market participants, make a gross error in claiming that lower interest rates and lower reserve requirements would stimulate growth and lower the CAD.

The real criticism of Governor Subbarao should have been that he should not have lowered interest rates and liquidity to the extent he did in 2008-09, and that in the recent period he should have raised interest rates more sharply and tightened money.

But that was nobody's criticism then, and it is not so now. As such, the critics of Governor Subbarao are dancing in mid-air with nebulous concepts which deviate from the basic tenets of macroeconomic policy.

Eventual Triumph

The rough and tumble of the current debate does not enable a fair assessment of Governor Subbarao's achievements. When the definitive history of the recent period is written, Subbarao's policies will be better appreciated.

As he rides into the twilight, he can hold his head high knowing that ultimately he made an important contribution to economic policy and that he did what was right, while being aware that he would be savagely criticised.

Let us salute Governor Subbarao.

RBI Governor D. Subbarao did not succumb to the argument that lower interest rates would stimulate growth and lower the current account deficit.

Please Note: This article was first published in The Hindu Business Line on August 23, 2013.

This column, Maverick View is authored by Savak Sohrab Tarapore. Mr. Tarapore, is an economist and he runs his own Multi-Language Syndicated Column. Mr. Tarapore's other column, which appears in The Freepress Journal, is titled Common Voice.

The views mentioned above are of the author only. Data and charts, if used, in the article have been sourced from available information and have not been authenticated by any statutory authority. The author and Equitymaster do not claim it to be accurate nor accept any responsibility for the same. The views constitute only the opinions and do not constitute any guidelines or recommendation on any course of action to be followed by the reader. Please read the detailed Terms of Use of the web site.


Equitymaster requests your view! Post a comment on "Subbarao, take a bow". Click here!


More Views on News

How to Ride Alongside India's Best Fund Managers (The 5 Minute Wrapup)

Jun 10, 2017

Forty Indian investing gurus, as worthy of imitation as the legendary Peter Lynch, can help you get rich in the stock market.

Why Hasn't Warren Buffett Rung the Bell Yet? (The 5 Minute Wrapup)

Aug 22, 2017

It's surprising Warren Buffett hasn't warned investors about the expensive stock market? Let us know why.

Think Twice Before You Keep Money In A Savings Bank Account (Outside View)

Aug 22, 2017

Post demonetisation, a cut in bank savings deposits rates was in the offing.

A Darkness Is Spreading Across the US (Vivek Kaul's Diary)

Aug 22, 2017

Today, we are attacked by one preposterous thing after another, each of them even more absurd than the last.

Dear PM Modi, India is Already Land of Self-Employed, and It Ain't Working (Vivek Kaul's Diary)

Aug 21, 2017

Most Indians who cannot find jobs, look at becoming self-employed.

More Views on News

Most Popular

A 'Backdoor' to Multibaggers: It's Like Investing in Asian Paints Ten Years Ago(The 5 Minute Wrapup)

Aug 10, 2017

Don't miss these proxy bets on growing companies or in a few years you will be looking back with regret.

The Most Important Innovation in Finance Since Gold Coins(Vivek Kaul's Diary)

Aug 10, 2017

Bill connects the dots...between money and growth, real money and real resources, gold and cryptocurrencies...and between gold, cryptocurrencies, and time.

Signs of Life in the India VIX(Daily Profit Hunter)

Aug 12, 2017

The India VIX is up 36% in the last week. Fear has gone up but is still low by historical standards.

Bitcoin Continues Stellar Rise(Chart Of The Day)

Aug 10, 2017

Bitcoin hits an all-time high, is there more upside left?

5 Steps To Become Financially Independent(Outside View)

Aug 16, 2017

Ensure your financial Independence, and pledge to start the journey towards financial freedom today!


Become A Smarter Investor In
Just 5 Minutes

Multibagger Stocks Guide 2017
Get our special report, Multibagger Stocks Guide (2017 Edition) Now!
We will never sell or rent your email id.
Please read our Terms


Aug 22, 2017 (Close)