RBI chief challenges “group wisdom” on economy

August 29, 2011

India’s central bank chief Duvvuri Subbarao may not be an established economist or a career banker, but he has a rare set of skills — of an administrator, non-conservative thinker with degrees in physics and economics — who can take on the group wisdom of economists and markets.

While delivering an address on “Role of Economics in Policy Making” at the golden jubilee function of the Indian Economic Service — the career economists in Indian administration — he said they were challenging the wisdom of “celebrated” economists and economic models.

That may be the reason why Subbarao was probably alone in opting for a 50 basis points rate hike in July while the majority of panel members favoured a pause in monetary tightening or at the most a 25 basis points rise in rates.

The Reserve Bank of India (RBI), headed by Subbarao, is one of the most aggressive inflation fighters among central banks, and has raised rates 11 times since March 2010, though inflation still remains at over 9 percent.

India’s finance minister Pranab Mukherjee is said to have been annoyed by an almost open revolt by Subbarao last year against the setting up of a body headed by the finance minister to regulate disputes among regulators. Later, the RBI governor was also made a co-chairman of the body.

In the last two years, Prime Minister Manmohan Singh and Finance Minister Pranab Mukherjee may have been blamed for inadequate measures to contain inflation and corruption, but Subbarao has been widely hailed for his “heads on” approach to contain inflation.

His two-year extension was widely hailed by economists and the markets, and was considered a sign of the prime minister’s faith in a person who served under him. Analysts say the finance minister has virtually handed over the task of containing inflation to him. And he is trying his best.

It is another matter that Subbarao would often remind the finance minister that inflation cannot be contained through monetary action alone.

In fact, after getting a two-year extension despite apparent opposition by some people in New Delhi, he has become bolder.

Quoting Paul Samuelson, Subbarao told the officials, “I don’t care who writes the nation’s laws as long as I am able to write its text books.”

Some people may consider his humility and courtesy to even junior officials as intellectual weakness, but he can challenge the economic models of established economists in New Delhi and global think tanks.

Referring to a June article in the Economist, which declared India as one of the top over-heated economies among emerging markets, he questioned their parameters.

Taking a dig at the celebrated economists, Subbarao said just before the global crisis in 2008, the economists had started behaving as if the last question in economics has been answered and they have found the holy grail.

Analysts admit that he has been “baptised by fire” caused by the Lehman brothers’ bankruptcy and the subsequent financial and economic crisis.

His co-ordination with officials of the finance ministry and finance minister Palaniappan Chidambaram helped India withstand the turmoil.

Referring to his test during the global crisis, Subbarao said he felt physical stimulus must be more than what the models suggested because the models were made for economics and not for crisis.

Given the current upheavals in the global markets and threats of a double-dip recession in the U.S., India can still bank on its chief banker.

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