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Subbarao Bids Adieu to RBI After A Job Well Done

Outgoing RBI Governor D. Subbarao leaves with a parting speech that will make some snigger, but it has lessons in it for most others.

I thought he had a great first speech in 2009, by the way.

I have been a vocal critic of the loose monetary policy of the RBI, and in many ways have derided it about its inconsistent stance on inflation.. Subbarao, to his credit, changed the stance of the RBI from an age-old “If we raise rates, we risk the rupee rising” (see his first speech) to “oh come on, no one’s allowed to buy our debt anyway”.

Subbarao defends RBI’s monetary actions as the best action they could have taken with the information they had. He also talks about the Indian version of operation twist recently, saying it would do the same thing it was supposed to in the US, but as I’ve said, it’s bound to fail.

However, for all these faults, Subbarao has been one of the best central bank governors of our time. The RBI is now releasing more data than ever. They publish information consistently. Subbarao worked with a timing policy for data releases (sorely needed in India) and ensured there were recordings and transcripts of all post-policy conference sessions. He raised and lowered rates twice, and relied more on data than on hearsay. He pointed out the faults in our economic data like IIP.

He says that the reason for our high CAD was simply that the government didn’t do enough. As much as I’d like to believe that, it should have created a layer of monetary tightening even as the CAD remained too high.

And he left with a light remark on the strained relations between the RBI and the Finance ministry.

Gerard Schroeder, the former German Chancellor, once said, “I am often frustrated by the the Bundesbank. But thank God, it exists.” 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.”

I don’t want to give a eulogy, and I don’t know if the Central Bank governor will ever read this. But Thank you, Mr. Subbarao.

  • Karl says:

    Don’t agree with you at all dude. The root cause of inflation and currency depreciation is central banking and lending the created money at interest (technically usury). The way the system is designed ensures that at any point of time there is insufficient money to pay off debt + interest. It is this artificial scarcity which prevents manufacturers from reducing prices unless they are forced to liquidate in times of desperation. The root cause of all our economic problems and income inequality is the way the central banking system is designed. It is up to us the people to really spend some time understanding the fraudulent nature of our monetary system. The Federal Reserve Vice Chairman Alan Binder said “The last duty of a central banker is to tell the public the truth”. Paradoxically, that is the only true statement made by a central banker.

    • Leo says:

      nice one KARL well done .. i liked Walter BAGHOT too… Lombard Street the book
      THE FUNNY part is central banking has become a fraud shop to fiddle with the system instead of doing the right thing.TODAY the central banking has become a cheat machine.
      GOOD BOOK if u have not read it read it pretty good

  • Charles says:

    He did a great job and held his nerve when I think a lot of people were suggesting rates should now be cut. Likewise he has waited it out as long as possible before actually beginning to raise rates. That makes him the enemy of both sides. The only minor blemish was towards the end by signaling pseudo capital controls and sending the exchange rate into a tizzy

  • Krishna says:

    HI Deepak,
    I would agree with your points. He has done his best.

  • Px says:

    Subbarao`s record shows that his deeds didn’t essentially match his words, his baby steps and indecisive deeds did little to curb inflation as u have pointed out umpteen no of times and worse the money printing gave us little growth over the longer term.
    He cant wash his hands of the mess that has been done during his tenure… period..
    People will understand the effect of the policy of the fisc and monetary authorities under Congress upa once they realize that their long term monetary savings ie fds, bonds ppf and pfs are worth a fifth in terms of purchasing power !
    Both Subba and PC seem to have learnt a lot from burns !

  • Gold Bug says:

    Mr. Subbarao is a seasoned bureaucrat. Don’t get moved by his farewell speech. His self glorifying speech was totally devoid of realities. The Indian Elite class is the major culprit for this whole mess of which Subba is a part (silent spectator). They consumed like the Greeks without any rise in productivity/restructuring during the short period when QE tap was open.
    Now it is pay back time like Greece.

  • DJ says:

    What I haven’t heard as criticism of Subbarao is that he did not try to bring down “inflation expectations” at all. AFAIK a central bank plays a key role in not just executing policy based on inflation estimates, but by managing inflation expectations and making sure to signal to markets that it is serious about drawing a line on inflation.
    In other words, a central bank needs to signal to markets that it is an inflation hawk, at least in words if not in action. This is more important than one thinks, because the market factors in an understanding of whether a central bank is an inflation hawk or dove.
    In 2010, his speeches talked about the fact that he couldn’t do anything about inflation because it was due to supply constraints. In 2011 and 2012, he kept insisting that inflation would come down in the next quarter and he would consider cutting rates. This dovish-ness played a large role in entrenching high inflation expectations. And, it is doubly stupid because it undermines the policy by telling people that it is temporary.
    I got tired of pointing this out in this blog year after year. Even if he took the same policy actions as he did, he would have been better served by at least paying lip service to concern for high inflation.
    He feels that he responded to the data appropriately. But, one of his primary jobs was to manage inflation expectations, something he did not do. And, I don’t think he realizes that he needed to do this.

  • DJ says:

    In short: it is not useful to raise rates or keep rates steady when inflation is high and say that inflation will come down next quarter and we will cut rates. Because, the market will factor in an expectation of a rate cut in advance, and that on its own, will work against bringing down inflation. It reduces the efficacy of the rate hike as it is seen as temporary. Subbarao kept doing this all through his stint. And, as expected, we kept hearing from every businessman that a rate cut will be coming through soon. Given this, I don’t understand how or why people think he did a good job? It was a textbook demonstration of how not to tackle inflation and how not to communicate policy.

    • Leo says:

      he has done an ok job considering the pressure from SINGH and lungi .but he could have behaved like an IAS officer and done the right thing and raised rates 3 years back when inflation was really rocketing up.Next guy is even worse he wont raise at all till there is panic

      • DJ says:

        Totally disagree. I don’t think he has done an ok job and I mentioned one of the reasons why. And, that was only monetary policy. If one were to look at regulation, RBI has done even worse! In fact, I can’t see how things could be worse.
        And, this is not based on what happened in 2012 and 2013. The problems occurred much earlier in 2010. It is a bit superficial to just look at recent events and blame it on the politics between RBI and government. In fact, this kind of superficial criticism is counter productive, because it doesn’t get into the meat of the issue, thus denying proper diagnosis and correction. But, this is what people in India do, just find someone to blame without actually understanding or fixing anything.
        Here is a mention of the problems with policy communication in 2010 and 2011, which had nothing to do with govt pressure:
        And, then, there is the worse handling of regulation. The narrative RBI promoted was that their luddite approach in 2008 had helped them handle the crisis better. It was a wrong assessment that holds back reforms even now, regardless of political interference. And, it is still a position wrongly held by many people in govt and business. This is a major failing of the RBI and points to the lack of intellectual expertise within the ranks.
        The goal here is not to demonize Subbarao but to correctly diagnose the institutional problems at the RBI and to hope for greater intellectual depth and honesty, going forward. Once we have the right institutional structure, we can bother about whether or not there is political interference.

  • Leo says:

    after all the QE done by subu he didnt get an extension so he gave his farewell gift.
    They should have raised rates long back to contain the deficit spending .Now the problem is so huge now currency can tank another 40% if they dont take control of the situation.

  • Leo says:

    THE ONLY WAY OUT will be raise rates let the debtors go bust start fresh.Liquidate the debt if u dont it will get out of hand .INdia is a bubble so is the rest of the world..U cant make a fortune will monetary rigging …u have to do things differently and efficiently .But no one is prepared for that i guess.
    I would like to tell the author of this article… SIR RBI and govt are 2 sides of the same coin.
    When u say we dont allow others to buy our bonds.OK so lets say we do allow ok.THen some black swan hits u see massive panic in bond mkt .this is just one scenario there may be many.Bond mkt is way of blackmailing the govt to do wrong things.We need a gold standard and should not live beyond our means.

  • Px says:

    Theek Hai seems to be the verdict on Subba Raos tenure !

  • mangoman says:

    Fully agree with Gold Bug and DJ

  • mangoman says:

    DJ and Gold Bug..please read my blog where in I have written time and again about Subbu’s mistakes and about his inability to control the ‘inflation expectations’.
    But we also emphatize with him about the enormous pressure he got from the crooks who rule us. Also I don’t rule out the indirect pressure ( in all means) by the corporate thugs.
    But yes he could have shown more spine.
    But he deserves applause atleast by admitting his mistakes and putting blame on government fairly and squarely.

  • mangoman says:

    Remember the broker mafia telling about the ‘imminent rate cut’ all throught he last few years which kind of guaranteed the ‘real estate investors’ to hold on to the price foolishly.
    Hope Raghuram Rajan is a no nonsense man.