RBI’s 2012 policy rates: What makes Subbarao click?

The government and investors set the agenda for the executive in normal times. But the year 2012 will go down in Indian financial history as the executive setting it for the government and convincing investors that it is right and not them. It was an extraordinary year for the Indian economy with investments plunging, profitability falling, and the much-cherished growth rate falling to a near decade low.

If it had been central banking the world knew as former Federal Reserve chairman Alan Greenspan practiced, there would have been interest rate cuts and more monetary easing, drawing cheers from investors and corporates. It was not. Reserve Bank of India governor Duvvuri Subbarao defied finance minister P Chidambaram and investors, clamouring for an interest rate cut, citing the messy government finances and stubbornly high prices.

Subbarao dismissed Chidambaram’s roadmap on fiscal consolidation saying that he knows the compulsions the government faces and that it was not credible for him to join the party. “Having been in the government, I want to say that I also acknowledge the challenges of the government, especially of the finance minister, in a democratic set-up like ours,” said Subbarao, a day after the roadmap.

“So, what everybody, including the RBI, is looking for is a little more detail on how this fiscal roadmap will be implemented in the short and medium-term,” said Subbarao, who was finance secretary to Chidambaram in the past. Subbarao’s reluctance to play ball with either the government, or investors, who increasingly tempered their own expectations on rate cuts as the year progressed, sets the regulator apart when others are bending backwards to please the government, though some of their actions could harm the industry and investors in the long run. That prompted a wry comment from Chidambaram, which few missed. “If the government has to walk alone to face the challenge of growth, then we will walk alone,” was Chidambaram’s response.

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