In his last public speech as the governor of the Reserve Bank of India (RBI), D Subbarao took the opportunity to say more than just goodbye.
He blamed the government for a loose fiscal stance during 2009-12, which curtailed the central bank’s degree of freedom and delayed its response.
“Had the fiscal consolidation been faster, it is possible that monetary policy calibration could have been less tight,” he said. “The economy would have been better served if our monetary tightening had started sooner and had been faster and stronger.”
He said India missed the opportunity of correcting structural problems when there was ample liquidity floating globally.
“Had we used the breathing time that this gave us to address the structural factors and brought the current account deficit down to its sustainable level, we would have been able to withstand the taper. In the event, we did not,” said Subbarao, adding, “We had made ourselves vulnerable to sudden stop and exit of capital flows driven by global sentiment.”
Referring to criticism that RBI’s tightening impacted growth, he said if such was the case, growth should have responded to the rate cuts of 125 bps between April 2012 and May 2013, cash reserve ratio cut of 200 bps and open market operations of Rs 1.5 lakh crore last year. India’s economic activity slowed owing to a host of supply side constraints and governance issues, clearly beyond the purview of the Reserve Bank, he said.
He said the RBI’s “baby steps” were actually a balancing act between preserving growth on one hand and restraining inflation on the other. “I’ll be known as the baby-steps Governor!” he said.
He said an autonomous and apolitical central bank is a delicate arrangement and will only work of the government respects the autonomy of the central bank.
Wrapping up, Subbarao said he had come to Reserve Bank as the ‘Great Recession’ was setting in and would be finishing now as the ‘Great Exit’ is taking shape, ”with not a week of respite from the crisis over the five years.”
He recalled being told that he would be the only governor to have not experienced currency crisis just a few months ago.
“I didn’t know whether to feel cheated or treat that as a badge of honour. Now of course, I don’t have to make a decision,” he said.
“I do hope finance minister Chidambaram will 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,’” he said
HDFC chairman Deepak Parekh said, “It was the most difficult time of any governor including the 1991. And I think he has done a remarkable stable job, kept his head high and governed and run the RBI to the best of his ability and we cannot criticise it as it was the worst period on our history.”
Deputy governor H R Khan said, “He has tried to simplify communication, talk straight and stead fast in whatever he says. I think that has paid rich dividend to Reserve Bank as a public institution.”