India Insight

(Any opinions expressed here are those of the author, and not necessarily those of Thomson Reuters)

Finance Minister P. Chidambaram is not the only one walking alone.

Duvvuri Subbarao, the Reserve Bank of India (RBI) chief, also seems to be on a solitary, and one hopes, contemplative walk.

It's not just the government putting pressure on the central bank to act and cut rates.

Minutes of a RBI advisory panel on monetary policy released on Wednesday showed Subbarao went against the advice of most external members, including economists and academics, in deciding to keep rates on hold at the Oct. 30 meeting.

Five of the six external members present had suggested a cut in the repo rate, with two suggesting a chunky 50 basis point cut. The governor thought otherwise, opting to lower the cash reserve ratio by 25 basis points.

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.

The usually crisp and precise P. Chidambaram was uncharacteristically vague on Monday while announcing the government’s fiscal consolidation plan. While pledging to bring the fiscal deficit down to 3 percent in 2016-17 from around 5.3 this fiscal, the Harvard-educated minister gave no details on how the government would achieve this feat.

Perhaps the finance minister should remember that uncertainty and lack of clarity can spook markets and investors. We saw that when the government took months to clarify the controversial GAAR norms which made foreign investors jittery.

Chidambaram’s announcement is unlikely to impress investors, rating agencies and lenders like the IMF, who want the government to slash subsidies and cut spending.

Not surprisingly, the Reserve Bank of India (RBI) kept the repo rate on hold on Monday, just days after the Congress-led government dropped a cluster bomb of several reform measures on “big bang Friday”. #gallery-1 { margin: auto; } #gallery-1 .gallery-item { float: left; margin-top: 10px; text-align: center; width: 33%; } #gallery-1 img { border: 2px solid #cfcfcf; } #gallery-1 .gallery-caption { margin-left: 0; }

Though most experts thought that the RBI would not cut rates on Monday, markets were hoping that central bank governor Duvvuri Subbarao would oblige them just a little bit. The Sensex ended 78 points higher, but was up 200 points in anticipation.

Considering the state of the Indian economy and governance, the reforms did not merit immediate rate action. Market and economy watchers should be patient and wait for FDI — “foreign direct investment” — approvals to go through.

Is Duvvuri Subbarao, governor of the Reserve Bank of India, considering an alternative career in stand-up comedy? In July, Subbarao tried to lighten the usually grey world of central banking with a self-deprecating wisecrack, linking rising prices and his receding hairline.

“I must admit that even at a personal level, I do not know how to interpret inflation. Twenty years ago when I had a thick mop of hair, I used to pay 25 rupees for a haircut … and now, when I have virtually no hair left, I am paying 150 rupees for a haircut,” he said at a conference.

That’s harmless, and pretty funny. But on Tuesday, the governor went a step further.

It’s a laudable effort that often gets more brickbats than bouquets. This year, when Finance Minister Pranab Mukherjee presents the Union budget in parliament on February 26, he will walking a tightrope between managing ballooning fiscal deficit and supporting economic recovery in Asia’s third-biggest economy.

Expectations from the finance minister, as always, are high — people and corporates want more in their pockets. There has been no let-up in the rise of food prices and most middle-class families still have to wait for annual sales to get branded products home.

In other words, the nation would like to see changes in tax rates, consumables getting cheaper and credit continuing to be available easily.