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Thursday, 11 August 2011 00:00
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Some months ago, when Duvvuri Subbarao was at odds with the finance ministry on how quickly new bank licences should be given out and the criterion for deciding these, few thought he’d get the extension that most of his predecessors got after completing their three-year term. But with the US and European crises getting murkier—the odds of a US recession are said to be one in four—the government wisely decided that rocking the boat wasn’t a good idea. More so since Subbarao, who was baptised by fire (Lehman collapsed within a short while of his taking over), has done a good job of keeping India relatively insulated from the extreme volatility that followed Lehman. Indeed, despite the sharp increase in inflows and the rupee volatility, Subbarao stayed away from the traditional policy of buying dollars—given how exports still grew, he appears to have been vindicated.

Given the banking sector has come out relatively unscathed even after a period of high growth, Subbarao’s leadership has been good for RBI. Although some, like the latest issue of The Economist, suggest RBI has been somewhat lax in giving out what it calls get-out-of-jail cards and prefers to not recognise bad loans if it thinks doing the right thing would put the banking system’s stability at risk. Introduction of the base rate, similarly, has ensured the transmission of monetary policy is faster; the policy paper on deregulation of savings rate shows RBI was on the right track, though nothing has come of it so far. Many criticise Subbarao for being in sync with the finance ministry after taking what looked like an independent stand—this, however, is a bit of a myth, since the system will collapse if both are at loggerheads. But since the good that men do is oft interred with their bones, if India’s growth collapses, Subbarao will probably be remembered for his sharp 50 bps rate hike at a time when both global and Indian growth is slowing. While there are divergent views on whether this was the right policy, and even on whether RBI should be looking at CPI or WPI to determine policy action, what was inexplicable was the conclusion, as recently as July 26, that India’s growth momentum was still strong—indeed, it didn’t need the S&P downgrade for RBI to figure out the challenges to global growth were serious. What is true, though, is that this endeared him to the inflation-scarred political class.


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