RBI governor Duvvuri Subbarao's unenviable report card

As the Reserve Bank of India governor Duvvuri Subbarao prepares to hang up his boots in two months, expect sighs of relief from many quarters.

For poor money management and an extraordinary ability to confuse using contradictory signals over the past five years have left the Street battle-weary.

To be sure, central bankers love to keep the markets guessing. Ben Bernanke, the US Federal Reserve chief, did just that six weeks back, sending everything into a tailspin by hinting quantitative easing could taper soon.

Only to follow with a volte face last week, when he reiterated commitment to a very accommodative monetary policy because growth in jobs in the US last month (up 195,000) looks increasingly illusory. Guess why? More and more unemployed Americans have stopped looking for a job!

Yet, barring the stray hiccups, Bernanke’s term has been a very successful one that reinforced the dollar’s supremacy as the world’s reserve currency.

So why has the dollar risen despite a wobbly American economy where GDP growth wallows under 2%, unemployment sears at 7% plus and core inflation is a flaccid sub-1%, reflecting widespread slack?

Why hasn’t the dollar crumbled under the avalanche of easy money unleashed by the Fed, which bloated its balance sheet by more than $3 trillion since the 2008 Lehman disaster?

The simple answer is that in Bernanke, the US has had one of the best money managers ever, who ain’t a Paul Volcker hawk or an Alan Greenspan dove.

But in Subbarao, India has a fickle monetarist, whose fetish for changing goalposts has meant the economy totters with average credit and deposit growth rates falling from 20% plus when he took charge in September 2008 to well under 15% now.

During his reign, India’s savings rate fell from 34% of GDP to barely 30%, trade deficit has widened from $120 billion to almost $190 billion and, worst of all, the rupee has depreciated over 35% from 44/$ to nearly 60/$.

Subbarao has claimed that monetary policy is the preserve of the RBI and fiscal policy of the government. Should he not, therefore, share at least half the blame for the pathetic state of affairs?

After all, both monetary and fiscal policies have a fairly equal say in shaping an economy’s fortunes and misfortunes.

There’s more: Immediately after taking charge in September 2008, Subbarao generously reduced the repo rate by as much as 425 basis points (bps) up to April 2009. From there on till October 2011, he did a 180-degree turn, raising the rate a brutal 375 bps.

The sheer pace and magnitude of the cuts, and thereafter the hikes, have been unsettling, and makes one wonder if the flip-flopping had any merit at all to begin with.

To be sure, fighting inflation is the primary mandate of a central banker.
However, for Subbarao, this has become such an obsession he has ended up fighting growth. Between 2011 and 2013, headline inflation has fallen 140 bps, while GDP growth fell far more —  340 bps — with enormous societal costs.

And the biggest culprit of asset price inflation is the RBI itself. Here’s why: by conducting open market operations worth Rs 127,000 crore in fiscal 2012, the central bank exponentially expanded its balance sheet because it added an equal amount of rupee assets relative to forex assets. This, in turn, put the rupee under tremendous pressure.

What an irony, therefore, that the RBI had to subsequently spend Rs 112,000 crore to buy dollars and defend the very rupee it had pushed downhill.

Fiscal 2013 was more or less an encore and even today, the RBI continues with its ad hocism, having learnt no lessons.

Finding the right balance between growth and inflation is sure tricky, but it’s an art Subbarao has failed to master after five years in office.

Today, core inflation has fallen to 2.15%, but with growth itself dragging down to sub-5%, who is happy? Certainly not the busy housewife, who is battling cereal inflation at 17%; certainly not the automobile makers, who are selling less at lower prices; certainly not the neighbourhood showrooms selling consumer durables (whose production shrank 10% in May); and, certainly not harried corporates such as Ashok Leyland, which revealed deplorable earnings on margins that dodder at an embarrassing 1%.

To top it all, the Subbarao regime’s effort last week to cap the amount banks can borrow from the RBI in a bid to buoy the rupee turned out to be an unmitigated disaster, reflecting the desperation at Mint Road.

While the actions have done precious little to prop the rupee, the bond market swooned as yields surged 50 bps in barely 24 hours, causing mark-to-market losses of Rs 24,000 crore to debt mutual funds.

This situation could have been avoided with a little more tact. Instead, it has only hurt the psyche of the retail investor, who has always treated debt funds as a relatively safer option.

And all this for “smoothening excess forex volatility, to prevent disruptions to macro-economic stability”.

Stability indeed.

Hubris has never helped anyone. It is what brought Dick Fuld and Lehman Brothers, the Wall street behemoth that he led, to grinding bankruptcy in 2008.
Please wake up and smell the coffee, Mr Subbarao.

Sanju Verma is Group CEO, Violet Arch Securities