Subbarao Acted Unilaterally on Rate Hike

August 24th, 2011
in econ_news

by Sunil Chandra

Subbarao Econintersect:  It appeared at the time that the drastic increase of 50 bps in repo rates by the RBI (Reserve Bank of India) on 26 July 2011 was a desperate gamble by a Governor serving out his last few weeks.  Then two weeks later, as reported in GEI News, Reserve Bank Governor Duzzuri Subbarao was appointed to a extension of two more years in that post.  How desperate Subbarao may have felt is indicated in the just released (August 18) Minutes of the Technical Advisory Committee on Monetary Policy.  It appears that the Governor was the only committee member who favored the action taken.  He seems to have acted unilaterally.

Follow up:

From my Op Ed at GEI Opinion:

Finally, he could not resist the temptation and decided to go out with a bang. Reserve Bank of India Governor D. Subbarao (pictured), whose current tenure comes to an end on 05 September 2011, must have been a worried man in the run-up to the monetary policy review on 26 July 2011. Despite ten successive hikes in key policy rates, spread over 18 months, the Wholesale Price Index (WPI) continued to hover above 9% p.a. His best monetary efforts to control prices had come to a naught. Therefore, he did a repeat of the May policy action of a double whammy and increased repo rates by a stupendous half percent.

The TAC met only a week before the dramatic RBI rate hike announcement. It is interesting to note that out of the 08 members present, 04 advocated "wait and watch" and do not increase rates, 02 said no increase required but do so by 25 bps if deemed necessary and 01 said increase by 25 bps. The 8th member ( presumably the Governor himself) ignored this near unanimous sage advice and increased rates by 50 bps.

Now, having secured an extension in tenure (and following the turmoil in Europe), it will be interesting to see how Governor Subbarao retracts or takes further tightening steps.

Sources: RBI Press Release 18 August 2011, GEI News and GEI Opinion

About the Author

z Sunil_Chandra Sunil Chandra is CEO of an investment banking start-up, located in New Delhi. He was formerly associated with Punjab National Bank, one of India’s largest, and, later, as Country Head for some leading bond houses in India. He has earlier written for Hindustan Times and other publications.

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