Monetary Policy Under Reddy, Subba Rao and Rajan

The RBI governor Raghuram Rajan and two of his recent predecessors occupied the same position, but the challenges faced were different. Yaga Venugopal Reddy was at the helm when India was shining. Duvvuri Subba Rao became the governor after the 2008 financial crisis, and Raghuram Rajan was expected to turn around the economy when inflation was nearly in double digits and the GDP growth rate was declining.

Yaga Venugopal Reddy

Period of position: September 2003 to September 2008

Change in CPI Inflation during this period: 2.89 to 9.02 per cent

Change in the repo rate during this period: 7 to 9 per cent

Inflation was nearly 3 per cent in late 2003 when Y V Reddy became the RBI governor. But, by 2008 August, inflation was over 9 per cent. This means that inflation rose by 600 basis points in this period, while the hike in repo rate (7 in September 2003 to 9 to September 2008) was merely 200 basis points. This means that real interest rates have fallen because interest rates in this period had not risen proportionately. In this period, many economists point out, that as the RBI did not hike the repo rate adequately when inflation reached high levels, the general public felt that monetary policy would not quickly adjust to fluctuations in the value of money. The high GDP growth rate in this period is partly attributed to inflation.

In his reign, Reddy discouraged banks from speculating on the real estate sector. One of the strong decisions he took was disallowing the usage of bank loans to purchase raw land. He raised the risk weightage of commercial buildings and shopping malls under construction. Reddy also raised the reserve requirements of banks to ensure that banks do not lend excessively.

During his reign, the Finance Minister P Chidambaram said that the government would walk the path of growth alone, if necessary. Yet, Reddy initiated many reforms including the liberalisation of international acquisitions by Indian firms. He also subject Non-Banking Financial Companies (NBFCs) to greater scrutiny, warning them against charging high interest rates, and asking them to voluntarily exit public deposit activities.  Both Y V Reddy and Subba Rao played a major role in decontrolling the Indian National Rupee/United States Dollar exchange rate.

Duvvuri Subba Rao

Period of position: September 2008 to September 2013

Change In CPI Inflation during this period: 9.77 to 10.9

Change in the repo rate during this period : 9 to 7.25

Duvvuri Subba Rao, a former Finance Ministry official was handpicked by Chidambaram to replace Y V Reddy.  

In Rao's reign, food price inflation reached double digits and the repo rate became as high as 8.5 per cent in 2011 October. But, the repo rate was 9 per cent in July 2008 before he became the governor.  As inflation declined, he cut the repo rate to 7.25%, but this did not make his critics happy.

Subba Rao faced many challenged during his regime. The US Federal Reserve's quantitative easing policy led to greater FII inflows into India. India's GDP growth rate declined though everyone expected India to grow faster. The volatile Indian Rupee hit a low of Rs 68 to the Dollar.

Arvind Panagariya, currently the chairman of NITI Aayog, rated Subbarao as the worst performing RBI governor. But, when he was the governor, Subba Rao maintained that his actions were targeted at the common man who face the brunt of inflation and have no lobbies to represent himself.

Raghuram Rajan

Period: September 2013 till now.

Change in CPI inflation during this period: 9.84% to 3.66%

Change in the repo rate during this period: 7.25 to 7.25

When Rajan took charge as the RBI governor, expectations were high. Even though Raghuram Rajan was known for his position as the chief economist of the IMF, Raghuram Rajan's best journal articles are widely cited. 

As he had promised, he was willing to resort to accommodative monetary policy when inflation fell. Rajan often urged commercial banks and major mortgage lenders to pass on the benefits of repo rate cuts to their customers. Recently, Rajan urged real estate developers to cut prices to reduce their stock of unsold inventory.

Rajan's views are taken serious, regardless of how controversial they are. Rajan thinks that an economic slowdown reminiscent of the great depression of the 1930s may be imminent, and that Brazil's growth driven by cheap credit like in Brazil have harsh consequences. Unlike his predecessors, he would not be criticised for being too cautious because he predicted the sub-prime mortgage crisis of 2008.

Raghuram Rajan was not fully in agreement with the Centre's proposal to divest the RBI governor of his veto power over monetary policy, to form a monetary policy committee with majority of the members appointed by the government, and to transfer the debt management function to Centre. But, in the two years in which Rajan was at the helm, CPI fell from 9.52 to 3.66 per cent and WPI inflation fell from 6.1 per cent to -4.95 per cent respectively. This is largely because the RBI was a de facto inflation targeting bank under Rajan.