Career bureaucrat-turned-banker D Subbarao demits office on Wednesday after a 5-year stint as RBI Governor during a tumultuous period of global financial stress that has left rupee plumbing new depths, falling economic growth and high inflation.
While there were brickbats for his tight monetary policy that his critics called hawkish, there were any number of admirers for his stance they considered independent of the government, displaying the Central Bank's autonomy. Within days of moving to Mint Street in Mumbai in September 2008 from the North Block where he was Finance Secretary, Duvvuri Subbarao plunged into a crisis situation with the emerging financial meltdown, the worst world had witnessed since the 'Great Depression' of 1930s.
India came out largely unscathed from it mainly because of the sound fundamentals of the banking system and strict supervision by the RBI. But what Subbarao will most be remembered for will be the tough monetary stand that he took during the last one and half years when inflation was rising on one hand and economic growth stumbling on the other. Under his leadership, the RBI raised policy rates 13 times between March, 2010 and October, 2011, testing the government's patience. RBI's tough stance brought down wholesale inflation from double digits in 2010-11 to around 5 per cent now and core inflation declined to around 2 per cent.
Subbarao's unrelenting focus earned the ire of those in the government with Finance Minister P Chidambaram even remarking once that if the government has to walk the path of growth alone, it was prepared to do so.
Observers perceived the differences between the government and the RBI as not a healthy sign especially when the economy was under strain. The soft-spoken and affable RBI Governor vented his feelings towards the end when he said the problem lay more with the government and domestic factors than with problems outside.
He even quoted a former German Chancellor to say that Chidambaram would one day say 'I am often frustrated by the Reserve Bank, so frustrated that I want to go for a walk, even if I have to walk alone. But thank God, the Reserve Bank exists.' Favouring greater accountability for RBI, Subbarao said an arrangement should be worked out for the Governor to make two presentations a year before Parliament Standing Committee on Finance on the bank's policies and outcomes and answer questions from the members of the Committee.
Subbarao's critics say his policies resulted in the moderation of economic growth to decade's low of 5 per cent in the last fiscal. Defending his policy actions, the 22nd RBI Governor said on many occasions that growth moderated, but to attribute all of it to tight monetary policy would be inaccurate, unfair, and importantly, misleading as a policy lesson. "India's economic activity slowed owing to a host of supply side constraints and governance issues, clearly beyond the purview of the RBI," Subbarao, who completes his term on September 4, had emphasised several times.
He always defended his policy saying that inflation is a "regressive tax" and his focus was on containing prices in the interest of the vast numbers of poor.
As wholesale inflation started inching downward this summer, the Governor, a topper in the Civil Service exam in 1972, was faced with problem of falling rupee. Rupee against the dollar has depreciated over 20 per cent in the last three months and is at present hovering over 65 to the greenback. Even though he took several measures in consultation with the government to contain the freefall of the rupee, its downslide continued. The currency inched close to 69 against dollar last week.
The slide was triggered by the statement of Fed Chairman Ben Bernanke on May 22 that US may go in for quantitative easing later this year. "Admittedly, the speed and timing of the rupee depreciation have been due to the markets factoring in ‘tapering’ by the US Fed, but we will go astray both in the diagnosis and remedy, if we do not acknowledge that the root cause of the problem is domestic structural factors," Subbarao said in his last public lecture as Governor.
At the same time, growth in the first quarter of the current fiscal also plummeted to 4.4 per cent due to drop in mining and manufacturing output. Growth was at the slowest pace since the 2008 financial crisis, with all but one of the eight sectors registering a lower rate of expansion or contraction.
These are problems his successor Raghuram G Rajan, Chief Economic Advisor to Finance Ministry and former economist of International Monetary Fund, has to tackle. Subbarao himself summed up his innings succinctly in his last speech. "May you live in interesting times. I can hardly complain on that count. I had come into the Reserve Bank five years ago as the ‘Great Recession’ was setting in, and I am finishing now as the ‘Great Exit’ is taking shape, with not a week of respite from the crisis over the five years."