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Subbarao Duvvuri’s great exit from RBI

Mumbai, Sep 2 () : Subbarao Duvvuri demits his office of Governor of Reserve Bank of India, on Wednesday. Raghuram Rajan will take charge on September 4th.

Subbarao, a bureaucrat joined RBI in 2008 when India was facing a financial crisis, a situation that his predecessor faces now. To set right the liquidity crisis in Indian money markets, he cut the interest rates, a move ironically then seen as a Finance Ministry’s view.

Today, when he steps down he is seen as a man who did not walk along with the Finance Ministry. He was selected by Chidambaram for the top post and in 2009 Pranab Mukherjee took charge. Now, Chidambaram is back but the situation is very much changed.

Even after RBI decided as far as 2010 that there was no need for new banks, Mukherjee announced in the Budget that RBI will issue new bank licenses. Since then, Subbarao’s relations with Mukherjee had changed. He questioned the need for FSDC (Financial Stability and Development Council) and felt it a move to cut the autonomy of the central bank.

With Chidambaram back in the saddle, the strained relations between RBI and Ministry were expected to change. When Chidambaram expected RBI to announce a cut in interest rates at the Q2 policy review, Subbarao did nothing of that sort.

A disappointed Chidambaram said that his Government would walk alone in the drive to get growth. Subbarao a few days ago in a lecture said that Fin Min was free to walk alone but RBI was not responsible for growth issues. Dy Governor Subir Gokarn’s extension was recommended but Fin Min ignored it.

An infusion of funds in the markets during 2008-2009 sent inflation to double digit in coming years till March-April 2013. His weak effort to curb inflation by increasing 25 bps did no good. Soon after this started, the rupee started falling.

Till today it has touched 66 for a dollar and lost 22%. As he puts it that his tenure started during Lehman brother’s collapse termed a great recession and his going out is when US fed tapering plan of economic stimulus which he termed as great exit is happening.

Outgoing Governor says that structural reforms did not take place and Government allowed CAD to go beyond 2.5% limit set by the bank. His critics say that he should have in 2010-2012 shored up Forex reserves and had at least eight months stock to give rupee a backing.

Rajan who is an economist, unlike Subbarao can decide without taking advice from the people around. Here again going by Fin Min’s advice does not always do good like the rate cut in 2008. As economist Swaminathan describes Rajan as a good jockey but has a weak horse and the Governor designate saying he has no magic wand, Chidambaram and India are in for tough times ahead.

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