It is a little more than a year since D. Subbarao took over as Reserve Bank of India (RBI) governor on 5 September 2008. He walked into a minefield. The local money market froze in the aftermath of the collapse of investment bank Lehman Brothers on 15 September 2008. Then came the worst global economic downturn since 1929. Subbarao cut interest rates and did well to stabilize the money market.
He has since then been fighting another fire, this time fanned from New Delhi rather than Wall Street. The government needs to borrow in excess of Rs5 trillion—a record —to finance its huge deficit.
The Indian central bank has been less successful in assuaging the fears of the money markets on this occasion. The Indian yield curve is not a perfect indicator of inflationary expectations, but the inexorable rise in long-term interest rates does tell us something useful.
Subbarao will have other substantive battles in the years ahead. One, he will have to be part of a process to define what the central bank should do: be a stripped down macroeconomic manager or continue to be a lumbering beast which also manages the government debt, oversees banks and is a clearing house for government bond trading.
Two, he will have to defend RBI’s nuanced approach to monetary management, which is far better than the simplistic inflation targeting through changing interest rates that was a favourite of monetary fashionistas till their much-admired Western central banks embraced financial stability as a goal and quantitative easing as a tool.
Three, Subbarao will have to protect RBI’s independence from finance ministry marauders who have for long wanted the central bank to toe the New Delhi line. And the governor has also spoken of the need to change the culture of the central bank, making it more communicative and open to internal debate.
A year is too short a time to judge a central bank governor. But there is no doubt that Subbarao has got off to a good start.
What battles will Subbarao have to fight in the years ahead? Tell us at email@example.com