Govt to blame for rupee woes: Subbarao Breathing time should have been used to bring down current account deficit, he says in his last public speech as central bank head Reserve Bank of India (RBI) Governor Duvvuri Subbarao on Thursday blamed the government for failing to reduce the current account deficit, which had caused the currency to spiral and left the country vulnerable to an economic crisis. In probably his last public speech as RBI governor (he steps down in less than a week), Subbarao said pointing to factors outside India did not fully explain the rupee’s rapid depreciation. “Admittedly, the speed and timing of the rupee depreciation have been due to the markets factoring in ‘tapering’ by the US Fed, but we will go astray both in the diagnosis and remedy if we do not acknowledge that the root cause of the problem are domestic structural factors,” he said, delivering the Nani Palkhivala Memorial Lecture in Mumbai. The title of his lecture was ‘Five years of leading the Reserve Bank; looking ahead by looking back’. “At its root, the problem is that we have been running a current account deficit (CAD) well above the sustainable level, for three years in a row, and possibly for a fourth this year.” Subbarao said India was earlier able to finance the CAD because of easy liquidity in the global system. “Had we used the breathing time that this gave us to address the structural factors and brought CAD down to its sustainable level, we would have been able to withstand the ‘tapering’ of the ultra-easy policy of the US Fed. In the event, we did not do so and made ourselves vulnerable to sudden stop and exit of capital flows driven by global sentiment; the eventual cost of adjustment, too, went up sharply,” Subbarao said. The comments were broadly in line with Finance Minister P Chidambaram’s comments in Parliament on Tuesday, when he had said the government was paying a price for certain decisions during 2009 to 2012 which allowed CAD to swell. When asked to comment on Subbarao’s criticism, Chidambaram told reporters on the sidelines of a Cabinet briefing on Thursday that “this is no different from what I said day before yesterday”. Subbarao said reducing CAD was outside his domain, as RBI had very little policy space or instruments to deliver the needed structural solution. “The government’s loose fiscal stance in 2009-12 curbed Reserve Bank’s policy stance. It is good if the government and RBI act in concert in times of crisis,” he said, adding that “the central bank arrangement hinges on the government respecting its autonomy”. He, however, emphasised that the central bank’s policy was not to resort to capital controls, saying it was a must that it maintained focus on stabilising markets. The Reserve Bank of India governor dwelt at length on the central bank’s autonomy and said: “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 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’.” His reference was to the finance minister’s comment after last October’s monetary policy (when RBI maintained a status quo on rates) that he would walk alone on the path to growth. Subbarao also took a dig at the government’s comments that the foreign exchange markets were behaving irrationally, as the fall in rupee was sharp. “We have been hearing in the past three months that markets are misbehaving. The problem is reverse. We are not understanding the behaviour of the market,” he said, adding the policymakers should respond to the way the market was behaving. The governor was also candid to admit the central bank should have raised interest rates at a faster pace to tackle inflation in 2010-11. “With the benefit of hindsight, of course, 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,” he said but added that policy making was on a real-time basis, without the advantage of hindsight.
Posted on: Fri, 30 Aug 2013 01:38:01 +0000
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