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D Subbarao: A warrior revered for his skills and sagacity ended up fighting on wrong side

Subbarao drove into Mint Street in September 2008 during the financial meltdown. Policy choices then were more in the hands of the US Fed.

Aug 07, 2013, 04.00 AM IST
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Subbarao drove into Mint Street in September 2008 during the financial meltdown. Policy choices then were more in the hands of the US Fed.
Subbarao drove into Mint Street in September 2008 during the financial meltdown. Policy choices then were more in the hands of the US Fed.
As Raghuram Rajan gets ready to take over at Mint Street, outgoing governor Duvvuri Subbarao’s five-year tenure at the RBI resembles that of a middle distance runner who has a shaky start, accelerates in the middle, but falters at the finish.

Subbarao drove into Mint Street in September 2008 during the financial meltdown. Policy choices then were more in the hands of the US Fed. The best option was to follow the leader, and Subbarao did that.

Indeed, he had to ensure that one of the domestic banks did not collapse in the aftershocks of Lehman Brothers’ bankruptcy. His early days were unenviable. As the chaos subsided, Subbarao got a handle at the right time. Barring the first year when he could do little of his own, it was full of instances of correct diagnosis, but administering the wrong medicine.

Early in 2010 when things began to look up and it was time for interest rate hikes, he summed up the dilemma of central bankers across the world. And, Fed chairman Ben Bernanke’s back and forth on tapering off QE3, five years after easing, is an example of that.

“Getting out of an expansionary policy is much more difficult than getting into it,” Subbarao said in January 2010. “It is like a padma vyuhain Mahabharata — you know how to get in but not many people know how to get out. All the central banks in the world are struggling with that.”

Three and-a-half years later, those words sound like prophecy. How could someone who was so precise in his analysis go so wrong? The answer lies in the same epic that Subbarao often refers to: the Mahabharata.

Bheeshma — the warrior revered for his skills and sagacity — ended up fighting on the wrong side, Kauravas, acase of loyalty overshadowing duty to uphold dharma. Subbarao, a careerbureaucrat, was probably torn between his duty as a policymaker for the nation and loyalty to the government that he served for decades.

For anyone in government, growth is paramount because that ensures that coffers swell. As finance secretary before the governorship, his objective was to keep the government’s borrowing cost low. Is this where the roles of secretary and governor got blurred? After falling behind the curve in taming inflation, he turned stubborn and did not yield on lowering interest rates even when growth was faltering.

He rubbished the idea of high funding costs holding back growth and went to the extent of saying that “the blame game has to stop”.

 
He turned critical of the government’s fiscal situation, inaction on the policy and refused to play ball. His zeal to preserve the integrity of the RBI by refusing to lower interest rates a day after finance minister P Chidambaram rolled out a fiscal consolidation road map seeking a rate cut, lifted his stature. Chidambaram was not amused, saying, “If the government has to walk alone to face the challenge of growth, then we will walk alone.”

Months after, the price situation turned conducive for Subbarao to begin lowering interest rates with caution. The words, more than the act, will stand testimony to his ability to read the situation. Prices are rising again. Subbarao has also been tested by the rupee.

He has warned about the rising current account deficit for more than a year, but his words fell on deaf ears at North Block. Predictably, the rupee has slid. Though he has not intervened to stem the slide directly, he had to intervene by raising interest rates.

The measure appears half-hearted. He wanted rates to rise, but did not say so. A reasonable guess here could be that he did not touch the repo rate because the government persuaded him not to do so since it would be seen as a reversal. It is hard to believe that someone without conviction could bump up interest rates by 300 basis points in the market, but did not want to say so. The absence of clear communication is a double whammy.

It has not helped the rupee, but damaged the fixed-income market. Subbarao said, “There will be consequences for this. There will be pain in the economy. Somebody will have to bear the cost for this. Those costs are inevitable and unavoidable.” Many of his actions may not have reflected his thoughts, but most of his thoughts reflected the reality.

The 2010 speech shows that unlike Abhimanyu who was trapped in the chakra vyuha, Subbarao knew what he was getting into.
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