Vocal Interventionist: Subbarao oversees turbulent times

Rajiv Bhuva        Last Updated: August 10, 2011  | 22:36 IST

At the earnest of the Prime Minister, Duvvuri Subbarao - Governor of the Reserve Bank of India - has had his tenure extended by two years, up to September 4, 2013. His original three-year stint as the banking regulator has seen exciting times and a 360-degree turn in his policy management approach.

On September 15, just ten days after Subbarao took charge, Lehman Brothers filed for bankruptcy and the sub-prime crisis turned into a global contagion.  A financial meltdown followed. Though theories of decoupling were long making rounds, India's economy, its markets and its rupee were not immune, though the financial system was partially insulated.

Rajiv Bhuva
Rajiv Bhuva
So Subbarao, on his thirty-seventh day at Mint Road, joined global regulators in an interest rate cutting spree, cutting rates frequently in pursuit of liquidity management and insulating the economy from a logjam. What followed was six rounds of cuts in the repo rate by 375 basis points (a hundred basis points make a per cent), four rounds of reverse repo rate cuts summing to 275 basis points and the four cuts in the cash reserve ratio, by 400 basis points total. While reverse repo indicates absorption of liquidity, repo indicates the injection of liquidity. And cash reserve ratio is the percentage of banks' net demand and time liabilities parked in cash with the Reserve Bank.

Then Subbarao's priorities were to manage liquidity and combat growth slippage. Loose monetary policy was a catalyst to government's fiscal stimulus packages, meant to bring growth back on track.

But then inflation began to inch up.  Starting March 2010, inflation rising began to hit unsustainable levels. Subbarao began his 'baby steps' journey to get away from the loose monetary policy of his early days. Suddenly Subbarao's dual focus areas were to manage growth and fight inflation, and there followed eleven rate hikes where the repo rate went up by 375 basis points. Lately, considering the overall growth-inflation scenario, Subbarao is determined to persevere with this anti-inflationary stance.

In July, while reviewing the monetary policy for the quarter ended June, Subbarao, unlike many Indian regulators in the past and present, expressed a strong belief that controlling inflation is imperative both for sustaining growth over the medium-term and for increasing the potential growth rate. According to Subbarao, controlling inflation is critical to create a favourable investment climate, on which the economy's potential growth depends.

"Fiscal consolidation can contribute to a sustainable growth path by rebalancing demand away from government consumption and towards investment," said Subbarao. "The Reserve Bank's efforts of achieving low and stable inflation could also be supported by concerted policy actions and resource allocations to address domestic supply bottlenecks, particularly in respect of food and infrastructure," he added. That in hindsight was an indication that he knew his job best, and the government had to complement, alongside the Reserve Bank, with appropriate policies to rein in inflation and boost growth.

His tenure extension is indicative of the fact that the government, given the state of situation it is in and given the global financial climate, is comfortable to have a "truly" independent regulator guarding the economy.

"I am happy that the Government has reposed its confidence in me at this difficult juncture in the world economy," Subbarao commented upon his re-appointment. His extended tenure has extended challenges and uncertainties.  In 2008 he faced bank failures. This time round sovereign troubles have swept the developed world.

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