| Friday , August 30 , 2013 |
![Subbarao blames govt for sinking rupee]( "Subbarao blames govt for sinking rupee")
RBI boss delivers a parting kick | |||
| OUR SPECIAL CORRESPONDENT | |||
Mumbai, Aug. 29: Outgoing RBI governor Duvvuri Subbarao today launched a blistering attack on the UPA government for failing to respect the autonomy of the “apolitical” central bank and trying to circumscribe its role. Delivering his last public lecture before retiring on September 4, Subbarao said: “It is important that the mandate of the Reserve Bank of India is written into the statute so that it is protected from the political dynamics of changing governments.” The statement is significant since Subbarao has always believed that the RBI was being forced to carry the can for the government’s failure to put its finances in order and frame appropriate fiscal policies to kick-start a stuttering economy and slam a lid on its burgeoning deficits. The comments came on a day the markets stanched the bleeding and the Prime Minister conceded that domestic factors were also responsible for the economic “difficulty”. The rupee today soared by 225 paise to end at 66.55 against the dollar and the sensex jumped by over 400 points on the back of the RBI opening a special dollar facility for state-run oil companies. The Federal Reserve in the US, for instance, has a dual mandate that is clearly spelt out: it must control inflation and ensure job creation. Subbarao said: “Central banks make macroeconomic policy that influences everyday life of people; yet they are managed by unelected officials appointed by the government. Such an arrangement is deliberate, based on the logic that an apolitical central bank, operating autonomously within a statutorily prescribed mandate and with a longer time perspective, is an effective counterpoise to a democratically elected government which typically operates with a political mandate within the time horizon of an electoral cycle.” In 1977, the US Congress amended the Federal Reserve Act, stating that the monetary policy objectives of the US central bank were to “promote effectively the goals of maximum employment, stable prices and moderate long-term interest rates”. While doing so, the Fed must balance the “long-run growth of the monetary and credit aggregates” with the “economy’s long-run potential to increase production”. This is often called the “dual mandate” and guides the Fed’s decision-making in the conduct of its monetary policy. With no clear mandate set out in the RBI Act, the government has been able to blame the Indian central bank and its monetary policy for all the ills that have beset the economy over the past 12 months. “An autonomous and apolitical central bank is a delicate arrangement… and will work only if the government respects the autonomy of the central bank, and the central bank itself stays within its mandate, delivers on that mandate and renders accountability for the outcomes of its policies and actions,” the RBI chief added. Subbarao also waded into the contentious debate over whether or not the RBI’s monetary tightening had driven down growth without squelching inflation. He said it was “inaccurate, unfair and misleading” to attribute the moderation in India’s economic growth — which tumbled to 5 per cent in the year ended March 31 from 6.5 per cent in 2011-12 — to the RBI’s tight monetary policy. Growth had slowed because of a “host of supply-side constraints and governance issues” which were clearly beyond the purview of the RBI, he said. If the repo rate was the only factor inhibiting growth, he wondered why the economy hadn’t shuddered to life when the RBI cut the policy interest rate by 125 basis points between April 2012 and May 2013. He said the critics of the RBI’s monetary tightening policy “must also note that our degrees of freedom were curtailed by the loose fiscal stance of the government during 2009-12”. With the benefit of hindsight, he admitted that the economy would have been better served if the monetary tightening had started sooner and stronger. “I say that because we now know that we had a classic V-shaped recovery from the crisis (of 2008).” Growth had not dipped as low as feared after the Lehman crisis and growth in the subsequent two years had been stronger than earlier expected. Subbarao said the RBI’s anti-inflationary stance in 2010 and 2011 should be evaluated against a backdrop where food inflation led to wage inflation and then blew up into core inflation. He said this transmission was institutionalised in the rural areas because of the rural job scheme, MNREGA, where “wages were formally indexed to inflation”. The wage-inflation dynamic played itself out in the context of consumption-led growth, large fiscal deficits and implementation bottlenecks, creating a “potent cocktail for core inflation” which rose from 3 per cent at the start of 2010 to almost 8 per cent by the end of the next year. He said it was misleading to attribute the speed and timing of the rupee depreciation in recent weeks to the so-called “tapering” of the US Fed’s quantitative easing programme. The root cause of the rupee’s slump were domestic structural factors. “We have been running a current account deficit (CAD) well above the sustainable level for three years in a row,” he said. The CAD was estimated at $88.2 billion, or 4.8 per cent of the GDP, in 2012-13, far above the RBI’s comfort level of 2.5 per cent. He said the only way to reduce the CAD was to finance it through non-debt inflows. The outgoing governor said the mechanisms for the RBI’s accountability were also inadequate. He suggested that India would do well to emulate the US example where Fed governor Ben Bernanke explains to the US Congress the nuances of the Fed’s monetary policy. “Perhaps, we should institute an arrangement whereby the governor goes before the parliament standing committee on finance twice a year….” He also had a word for his bitter adversary, finance minister P. Chidambaram. Subbarao 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'." |
Printed from
![]()
Outgoing RBI governor Subbarao blames govt for sinking rupee
MUMBAI: On a day when the Reserve Bank of India engineered a 223-paise pullback of the rupeeto 66.60, outgoing governor D Subbarao squarely blamed the government for the domestic currency's travails which he attributed to domestic structural factors. He also said the loose fiscal policy adopted by the government between 2009-2012 had constrained the RBI's monetary policy.
Subbarao chose his address under the 10th Nani Palkhivala memorial lecture — his last public address — to tear into the government for misreading the economy. He lambasted the finance ministry's attempts to impinge on the RBI's autonomy through the Financial Stability and Development Council.
The governor came down strongly on the attempt by certain sectors to attribute volatility to 'misbehaving markets' and which he compared with God.
Subbarao chose his address under the 10th Nani Palkhivala memorial lecture — his last public address — to tear into the government for misreading the economy. He lambasted the finance ministry's attempts to impinge on the RBI's autonomy through the Financial Stability and Development Council.
The governor came down strongly on the attempt by certain sectors to attribute volatility to 'misbehaving markets' and which he compared with God.
The financial markets on their part had responded extremely positively to the RBI's move to lend dollars to state-owned oil companies. The rupee's gain from its historic low of 68.83 on Wednesday bolstered equity markets with the sensex rising 405 points.
The governor also took a direct dig at finance minister P Chidambaram who in October 12 very vocally expressed his disappointment with the governor for not abiding by his call for a rate cut. The FM had said that "if the government has to walk alone to face the challenges of growth, we will walk alone". Subbarao said that "I do hope Chidambaram will one day say: 'I am often frustrated by RBI, so frustrated that I want to go for a walk, even if I have to walk alone. But thank God, the Reserve Bank exists'."
Reacting to the attack, the finance minister said in Delhi that Subbarao's comments were no different from what he said on Tuesday. Speaking in Parliament on Tuesday, Chidambaram attributed the current woes not just to external factors, but to domestic factors allowing the fiscal deficit to be breached and the current account deficit to swell because of decisions taken during 2009-2011, a period when Pranab Mukherjee was the finance minister.
Reiterating RBI's decision to shun capital controls, Subbarao said it had no intention of targeting a level of exchange rate. "I've heard people say that the markets are misbehaving, that the markets do not understand our policies. I think the problem is the reverse, that we do not understand the markets. We should be able to take the market behaviour as a given, not to dictate how the market behaves," said Subbarao. The governor sought to draw a parallel between his response and the conversation between Albert Einstein and his physicist friend Niles Bohr. In response to Einsten's famous comment, "God does not play dice", Bohr had said "Albert, don't tell God what to do."
Subbarao said that if the RBI had erred at all, it was in not adopting a hawkish stance earlier. "I must admit in all honesty that the economy would have been better served if our monetary tightening had started sooner and had been faster and stronger," said Subbarao. But even here he indicated that the RBI was hamstrung by the absence of reliable data. "Just as an aside this episode highlights the importance of faster and more reliable economic data for effective monetary policy calibration," he added.
Another regret expressed by the governor was that he chose 'baby steps' to hike rates in 2009. "I will probably be remembered as baby-steps Subbarao, but if the RBI had acted more decisively, inflation could have been brought under control much sooner." Subbarao attacked proponents of the theory that the RBI had no role to play in inflation caused by supply side shocks. "In a $1500 per capita economy—where food is a large fraction of the expenditure basket—food inflation quickly spills into wage inflation and therefore into core inflation. In rural areas where MGNREGA wages are indexed to inflation such transmission is institutionalized," he said, adding that MGNREGA had pushed up rural incomes without commensurate increase in productivity.
"In 2008 there was enormous pressure on the RBI to emulate central banks in America and the UK, which resorted to quantitative easing to loosen monetary conditions, raise inflation expectations and lower real interest rates. We realize that the strategy was effective in the short term, but the excess liquidity has raised inflation pressures," said Subbarao. On the attempt to clip the RBI's wings by restricting its mandate to only monetary policy, he said, "We must ask repeatedly if reducing the mandate of central banks, when everywhere else their mandate is being expanded, is the right way to go." The governor also said that the government cannot use financial stability as an excuse to override the authority of financial regulators. "The governor must normally leave the responsibility to the regulators, assuming an activist role only in time of crisis."
The governor also took a direct dig at finance minister P Chidambaram who in October 12 very vocally expressed his disappointment with the governor for not abiding by his call for a rate cut. The FM had said that "if the government has to walk alone to face the challenges of growth, we will walk alone". Subbarao said that "I do hope Chidambaram will one day say: 'I am often frustrated by RBI, so frustrated that I want to go for a walk, even if I have to walk alone. But thank God, the Reserve Bank exists'."
Reacting to the attack, the finance minister said in Delhi that Subbarao's comments were no different from what he said on Tuesday. Speaking in Parliament on Tuesday, Chidambaram attributed the current woes not just to external factors, but to domestic factors allowing the fiscal deficit to be breached and the current account deficit to swell because of decisions taken during 2009-2011, a period when Pranab Mukherjee was the finance minister.
Reiterating RBI's decision to shun capital controls, Subbarao said it had no intention of targeting a level of exchange rate. "I've heard people say that the markets are misbehaving, that the markets do not understand our policies. I think the problem is the reverse, that we do not understand the markets. We should be able to take the market behaviour as a given, not to dictate how the market behaves," said Subbarao. The governor sought to draw a parallel between his response and the conversation between Albert Einstein and his physicist friend Niles Bohr. In response to Einsten's famous comment, "God does not play dice", Bohr had said "Albert, don't tell God what to do."
Subbarao said that if the RBI had erred at all, it was in not adopting a hawkish stance earlier. "I must admit in all honesty that the economy would have been better served if our monetary tightening had started sooner and had been faster and stronger," said Subbarao. But even here he indicated that the RBI was hamstrung by the absence of reliable data. "Just as an aside this episode highlights the importance of faster and more reliable economic data for effective monetary policy calibration," he added.
Another regret expressed by the governor was that he chose 'baby steps' to hike rates in 2009. "I will probably be remembered as baby-steps Subbarao, but if the RBI had acted more decisively, inflation could have been brought under control much sooner." Subbarao attacked proponents of the theory that the RBI had no role to play in inflation caused by supply side shocks. "In a $1500 per capita economy—where food is a large fraction of the expenditure basket—food inflation quickly spills into wage inflation and therefore into core inflation. In rural areas where MGNREGA wages are indexed to inflation such transmission is institutionalized," he said, adding that MGNREGA had pushed up rural incomes without commensurate increase in productivity.
"In 2008 there was enormous pressure on the RBI to emulate central banks in America and the UK, which resorted to quantitative easing to loosen monetary conditions, raise inflation expectations and lower real interest rates. We realize that the strategy was effective in the short term, but the excess liquidity has raised inflation pressures," said Subbarao. On the attempt to clip the RBI's wings by restricting its mandate to only monetary policy, he said, "We must ask repeatedly if reducing the mandate of central banks, when everywhere else their mandate is being expanded, is the right way to go." The governor also said that the government cannot use financial stability as an excuse to override the authority of financial regulators. "The governor must normally leave the responsibility to the regulators, assuming an activist role only in time of crisis."