India Insight

Subbarao: an RBI governor who can hold his own

When RBI Governor Duvvuri Subbarao had his tenure extended last year, a TV channel reported that 90 percent of bankers, economists and bond dealers in a poll felt the extension was good for the economy.

In June 2012, less than a year later, people were criticising him for defying widespread calls to cut interest rates, as stubborn inflation continued to bother him more than slowing growth .

Subbarao’s latest decision on Tuesday to hold the central bank’s key policy rate steady may increase the number of his detractors.

The RBI governor has always maintained that his focus is on fighting “sticky” inflation, which hurts the poor, and “some sacrifice to growth is an inevitable price“.

While pro-growth lobbies and Finance Minister P. Chidambaram might not agree entirely with the governor’s view, Subbarao has shown that it is tough to convince him to cut rates for vague fiscal plans.

Miffed Chidambaram widens rift with RBI

Finance Minister P. Chidambaram usually does not talk to the throng of news-hungry reporters and cameramen gathered outside the gates of the red sandstone colonial building which houses the finance ministry. A ‘no comment’ or ‘I don’t have anything to say’ suffices on an ordinary day. Tuesday, however, was not an ordinary day.

Some two hours after the Reserve Bank of India announced it would leave the repo rate unchanged, and said that battling inflation was a more important priority than backing growth, the assertive finance minister arrived in the ministry. He got out of his car and walked up to the voice recorders, microphones and camera-toting journalists waiting in the driveway.

He signalled them to quieten down, all the while having a look of contemplation on his face, as if weighing the words he was about to say very carefully. What happened next gave the clearest indication yet of a widening policy rift between the government and the Reserve Bank of India.

RBI chief challenges “group wisdom” on economy

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.