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Subbarao goes against his panel, again

November 22, 2012

(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.

The members arguing for a cut said that demand side pressures were not evident and there was a need to revive investments.

However, Subbarao said restraining demand was essential as inflation was expected to rise over the next few months.

In India, deciding rates is the prerogative of the RBI governor unlike the formal voting mechanisms at some banks like the U.S. Federal Reserve and European Central Bank.

In an interview to the Wall Street Journal earlier this year, Subbarao had said that going against the panel’s view was not always an easy option.

“It’s difficult … It’s certainly something you don’t do lightheartedly. You do think twice before going against their advice.”

Yet, Subbarao has done that repeatedly. He raised rates sharply in the second half of 2011 citing inflationary pressures, when the panel had suggested gradual increases.

That reveals a side to him which many had not expected when the career bureaucrat switched from the helm at the finance ministry to Mint Street, where the central bank is headquartered.

It’s not been an easy ride of late. Chidambaram has been piling pressure on Subbarao to cut rates, even holding a hurriedly called press-conference a day before the Oct. 30 review to put forward a fiscal roadmap that lacked any details on how it would be achieved.

Subbarao was not swayed, prompting the finance minister to say, “if government has to walk alone to face the challenge of growth, well, we’ll walk alone.”

The RBI governor has taken a key risk with his decidedly tough stance on inflation, which by his own admission, involves sacrificing short-term growth.

The economy continues to sputter with declining private investment demand and weak external demand, raising shrill calls from the industry for rate cuts.

Sujan Hajra, chief economist at Anand Rathi Securities and a former central bank official, supports Subbarao.

“The perspective for the governor is much bigger. His decisions are pretty balanced,” he said.

“At this moment, a rate cut won’t have positive gain for the economy,” Hajra said.

And one must not forget the adage that the central banker’s job is taking away the punchbowl just as the party gets going.

Subbarao’s detractors may argue that the party looks far away.


The veto power now resting with the RBI Governor to overrule the majority view of the panel members to decide on rate cuts needs to be reviewed. The process followed by US Federal Reserve or ECB needs to be aligned for our purpose. At least for now, 3/4 majority viewed should be taken on policy rate cuts etc.

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