Has Subbarao lost the opportunity to be a statesman?

Has Subbarao lost the opportunity to be a statesman?

A symbolic cut in policy rate would have supported recent reforms and also boosted business sentiment

There’s been enough written about the Reserve Bank of India’s(RBI) action on Tuesday and the almost universal approbation with which it was met, even by people other than those who run the edit pages of newspapers such as Mint.

For those who missed it entirely, the central bank left interest rates untouched and tweaked the ratio governing the amount of money banks need to keep with the central bank, releasing around Rs.17,000 crore into the system.

By doing so, the bank also ignored the fiscal consolidation planpresented by finance minister P. Chidambaram on Monday.

To be sure, there are problems with that plan, but my quibble with RBI governor D. Subbarao isn’t about what he did, which is entirely logical and justifiable.

Monetary policy needs to balance macro and microeconomic interests (in plainspeak, it needs to ensure the economy doesn’t receive any shocks, and also create a monetary environment where companies can thrive). It needs to act as a counterweight to the impact the government’s policies will have on money, a sort of yang to the latter’s yin. At the highest level, I also believe that it needs to reflect a dash of pragmatism and positive intent.

Most analysts, edit writers, even central bankers are likely to disagree with the third requirement I have mentioned. This, after all, requires governors of central banks to behave more like a statesman than a central banker and even a casual perusal of central banking will throw up a singular but strong argument against doing this: Alan Greenspan.

Sure, sometimes central banks are all that stand between profligate and misguided governments and economic ruin, but is that really the case here? Since taking over as finance minister, Chidambaram has made all the right noises and done the right things. I believe a symbolic cut in the policy rate by RBI would have strengthened his arm and also boosted business sentiment (to be sure, again, it wouldn’t have changed the environment much). I am also convinced it wouldn’t have taken us any closer or any farther from economic ruin than we already are.

I am, therefore, inclined to consider the lack of any substantive action by RBI on Tuesday as a lost opportunity.