“If the RBI’s repo rate was the only factor inhibiting growth, growth should have responded to our rate cuts of 125 bps between April 2012 and May 2013, CRR cut of 200 bps and open market operations (OMOs) of Rs 1.5 trillion last year,” :Reserve Bank of India Governor D Subbarao

Just a week ahead of his retirement, Reserve Bank of India Governor D Subbarao came down on the government, saying its “loose fiscal stance” curtailed the RBI’s operational freedom and India’s economic activity slowed owing to a host of supply side constraints and governance issues.

Subbarao, whose five-year tenure was marked by differences of opinion with the finance ministry over the question of targeting inflation at the cost of growth, said the root cause of the rupee depreciation was domestic structural factors.

Subbarao’s comments came on a day when an IMF report on the Indian banking sector said the RBI was not adequately independent of the government.

“There has been dismay about the ferocity of depreciation; there has also been a growing tendency to attribute all of this to the ‘tapering’ of its ultra easy monetary policy by the US Fed. Such a diagnosis, I believe, is misleading,” he said while delivering the Nani Palkhivala Memorial lecture, his last public meeting as the Governor.

He said supply-side constraints and governance issues were clearly beyond the purview of the RBI.

“If the RBI’s repo rate was the only factor inhibiting growth, growth should have responded to our rate cuts of 125 bps between April 2012 and May 2013, CRR cut of 200 bps and open market operations (OMOs) of Rs 1.5 trillion last year,” he said.

The root cause , he said is that India has been running a current account deficit (CAD) well above the sustainable level for three years in a row, and possibly for a fourth year this year. “Critics of our monetary tightening must also note that our degrees of freedom were curtailed by the loose fiscal stance of the government during 2009-12. Had the fiscal consolidation been faster, it is possible that monetary policy calibration could have been less tight,” he said.

Defending his policy, he said, “The RBI had run a tight monetary policy not because it does not care for growth but because it does care for growth. Inflation hurts, but hurts the poor much more than the better off.”

However, Subbarao admitted that for an institution with such a powerful mandate, the mechanisms for accountability are both inadequate and unstructured.

“Perhaps, we should institute an arrangement whereby the Governor goes before the Parliament Standing Committee on Finance twice a year to present a report on the RBI’s policies and outcomes and answers questions from the Committee. In my view, this will not only secure the accountability structure but also protect the RBI from any potential assaults on its autonomy.”

Subbarao was categorical that a central bank should aim first at price stability. “The fundamental responsibility of central banks for price stability should not be compromised. Second, central banks should have a lead, but not exclusive, responsibility for financial stability.” It is also important that the mandate of the RBI is written into the statute, so that it is protected from the political dynamics of changing governments, he said.

Mumbai: RBI Governor D Subbarao also touched on the media coverage on policy differences between the government and the central bank, especially on monetary loosening and bringing down interest rates.

Subbarao said in a lighter vein, “Gerard Schroeder, the former German Chancellor, once said, ‘I am often frustrated by the Bundesbank. But thank God, it exists’. I do hope finance minister P Chidambaram will one day say, ‘I am often frustrated by the 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.”

Earlier this year the government unveiled a host of steps to bring fiscal discipline and boost growth, but the RBI did not respond to it by effecting a rate cut prompting the finance minister to say, “We will walk alone, if need be.” ENS

Mumbai: Finance Minister P Chidambaram on Thursday reacted to RBI Governor D Subbarao’s comments on the reasons for the current economic woes, saying that his views were no different from that of the Governor.

“This is no different from what I said day before yesterday,” he told reporters when asked to respond to Subbarao’s criticism of government policies as responsible for the slowdown.

Speaking in Parliament on Tuesday, Chidambaram attributed the current woes to domestic factors allowing the fiscal deficit to be breached and the current account deficit to swell because of decisions taken during the tenure of his predecessor. PTI

In his last speech before retiring as the Reserve Bank of India (RBI) Governor and handing over the reins to Raghuram Rajan, D Subbarao highlights fact that the Indian rupee is not freefalling and the economy is not sinking because of him. In fact, he turns on the Manmohan Singh-led government and roundly slams it for its policies.

Subbarao was sharply critical of the government, blaming its “loose fiscal stance” for the current economic woes, and warned that the root cause of Indian rupee depreciation is “domestic structural factors.”

While the speed and timing of the Indian rupee’s depreciation was due to the markets reacting to US Fed announcements, Subbarao said, “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.”

He said it would be “misleading” to blame recent policy pronouncements of the US Federal Reserve for the decline in Indian rupee, which has slid 23 per cent against US dollar this fiscal.

“… there has been a growing tendency to attribute all of this (ferocity of Indian rupee depreciation) to the ‘tapering’ of ultra easy monetary policy by the US Fed. Such a diagnosis, I believe, is misleading,” he said in his last public lecture as RBI Governor.

While some of the growth slowdown was attributable to the RBI’s monetary tightening, he said, “India’s economic activity slowed owing to a host of supply-side constraints and governance issues, clearly beyond the purview of the RBI.”

Blaming the “loose fiscal stance of government during 2009-12” for slow growth and high inflation, he said, “Had the fiscal consolidation been faster, it is possible that monetary policy calibration could have been less tight.”

The governor has often been criticised from within the government for his tight money policy at the cost of growth.

The root cause behind the Indian rupee’s decline, he said, is a current account deficit (CAD) that’s running well above the sustainable level for three years in a row and may possibly continue at that level for the fourth year this year.

The only lasting solution is to reduce the current account deficit to a sustainable level, he said.

“Reducing the CAD requires structural solutions – RBI has very little policy space or instruments to deliver the needed structural solution. They fall within the ambit of the government.”

Subbarao, however said, that in the interim “we need to stabilise the market volatility, a task that falls within the domain of the Reserve Bank.”

The government aims to bring down the CAD, which touched a record high of 4.8 per cent of GDP in 2012-13, to 3.7 per cent of GDP (USD 70 billion) this fiscal. GDP growth slowed to a decade low of 5 per cent in the last fiscal. The RBI has pegged growth at 5.5 per cent in this fiscal.

Sacrificing growth on account of high interest rates was only for the short term, Subbarao said.

“… RBI had run a tight monetary policy not because it does not care for growth but because it does care for growth.”

The Indian rupee, which closed yesterday at a record low of 68.80 against the dollar, gained 225 paise to 66.55 today.

Subbarao said it is the RBI’s “avowed policy” not to target an exchange rate and it has stayed true to that policy.

“Our efforts over the last few years, particularly the last three months, have been to smoothen volatility as the exchange rate adjusts to its market-determined level so as to make the near-term cost of adjustment less onerous for firms, households and banks,” he said.

Referring to criticism that the RBI’s measures have been confusing and betrayed a lack of resolve to curb volatility, Subbarao said, “Let me first of all reiterate that our commitment to curbing volatility in the exchange rate is total and unequivocal.”

He, however, admitted the RBI could have communicated the rationale of its measures more effectively.

“But our actions were consistent. Our capital account measures were aimed at encouraging inflows and discouraging outflows. Also, we tightened liquidity at the short end to raise the cost of short-term money so as to curb volatility,” he said.

At the same time, he added, the RBI wanted to inhibit the transmission of the interest rate signal from the short end to the long end as that would hurt the flow of credit to the productive sector of the economy.

“…it is not the policy of the RBI to resort to capital controls or reverse the direction of capital account liberalisation,” Subbarao stressed. The RBI’s measures did not restrict inflows or outflows by non-residents, he added.

Here are the highlights of his speech:

* RBI Governor D Subbarao says moderation in economic growth not due to central bank’s tight monetary policy.

* Loose fiscal stance of the government between 2009 and 2012 curtailed RBI’s monetary policy freedom, says Subbarao.

* India’s economic growth slowed owing to a host of supply side constraints and governance issues: Subbarao.

* RBI’s tight monetary policy was because it cared for growth: Subbarao.

* Current account deficit (CAD) may be above sustainable levels this year too: Subbarao.

* RBI not targeting a level of exchange rate for Indian rupee; curbing volatility is the primary objective: Subbarao

* Subbarao says RBI not resorting to capital controls or reversing the direction of capital account liberalisation.