Comparing inflation under various RBI Governors

Apart from a super hawkish RBI Q1 2011-12 policy, there are some other interesting things to note.

Jul-11 was Dr Subbarao’s last policy meeting unless his tenure is extended. And there are quite a few similarities between Dr Reddy’s and Dr Subbarao’s tenure towards the end.

• Inflation reared its ugly head then and has been a major concern even now.
• Dr Reddy raised policy rates by 75 bps in Jun-08 (25 & 50) and by 50 bps in Jul-08. Both Jun-08 meetings were not policy meetings.
• Dr Subbarao raised policy rates by 50 bps in May-08 and Jul-08 and by 25 bps in Jun-11 review.
• It was a surprise then and is a surprise now.

I was keen to see how various RBI Governors have fared in their term. Though there are many parameters, Central Bankers (and others) would want to be judged on one major parameter – inflation. What was the average inflation in their tenure?

I just compiled this table which measures the average and median inflation during RBI Governors tenure since 1992. I use both headline and core inflation measures.

	Tenure		Average WPI
	Starts	Ends	Headline	Core	CPI
Dr. C.Rangarajan	22-Dec-92	22-Nov-97	7.47		8.63
Bimal Jalan	22-Nov-97	5-Sep-03	4.72	3.10	5.76
Dr. Y V Reddy	6-Sep-03	5-Sep-08	5.86	5.52	5.44
Dr. D Subbarao	5-Sep-08	Ends on 4-Sep-11	6.86	3.67	10.97
Crisis	Sep-08	Nov-09	3.40	1.16	10.38
Post Crisis	Dec-09	Till Jun-11	9.42	5.52	11.42

 

	Tenure		Median WPI
	Starts	Ends	Headline	Core	CPI
Dr. C.Rangarajan	22-Dec-92	22-Nov-97	7.57		9.19
Bimal Jalan	22-Nov-97	5-Sep-03	4.80	3.16	4.53
Dr. Y V Reddy	6-Sep-03	5-Sep-08	5.36	5.31	5.40
Dr. D Subbarao	5-Sep-08		8.87	5.21	10.27
Crisis	Sep-08	Nov-09	1.72	-0.05	10.49
Post Crisis	Dec-09	Jun-11	9.47	5.70	10.11

• As we can see, average inflation is highest in Dr Subbarao’s tenure. On core WPI inflation, it is lower than Dr Reddy’s tenure. Even in terms of CPI, Dr. Subbarao tenure sees a much higher inflation.
• In terms of median inflation, Dr. Subbarao is again highest in headline but lower in core than Dr Reddy’s tenure
• Dr Subbarao’s tenure was marked with both huge decline in inflation following the crisis and then a steep rise. So, there is a need to divide the period because of extreme numbers.

• As we can see, average numbers were much lower in crisis period but have shot up  post crisis period.
• Both average and median inflation in post-crisis period are much higher. Even CPI numbers are very high.

Overall, inflation numbers are around RBI’s preferred target of 5-5.5% during Bimal Jalan and Dr. Reddy’s time.

Some might say, inflation volatility has been higher during current times. This could be leading to worse record as well. The volatility table shows:

	Tenure		Volatility in WPI
	Starts	Ends	Headline	Core	CPI
Dr. C.Rangarajan	22-Dec-92	22-Nov-97	2.69		2.00
Bimal Jalan	22-Nov-97	5-Sep-03	1.85	1.58	4.10
Dr. Y V Reddy	6-Sep-03	5-Sep-08	2.18	2.12	1.71
Dr. D Subbarao	5-Sep-08		3.79	3.23	2.21
Crisis	Sep-08	Nov-09	3.44	3.03	1.43
Post Crisis	Dec-09	Jun-11	0.86	1.84	2.61

• As we can see, the volatility numbers are higher during crisis. Post-crisis volatility is lowest in the time series, THis implies higher inflation numbers are much stickier during post-crisis phase during Dr Subbarao’s time.  So volatility does not play a major role
• Though during Dr Bimal Jalan’s time, volatility is low as well. This implies his tenure saw low inflation numbers for much of the time.

This post is not to criticise Dr Subbarao’s tenure. It is just that how inflation has remained so high and persistent despite many rate hikes.

• Since Mar-10, RBI has raised policy rates by 325 bps, higher than 300 bps raised during Dr Reddy’s tenure. Dr Reddy raised policy rates between Oct-05 and Sep-08 implying in 36 months. Whereas this time it was raised by 325 bps in just 17 months.

	Hikes (in bps)
	Rev Repo	Repo
Dr. Y V Reddy	150	300
Dr. D Subbarao	375	325

• One difference is the alarcity with which RBI raised rates in 2008 as 125 bps were raised in just 2 months – Jun-08 and Jul-08. It has taken slightly longer with 125 bps between May-11 and Jul-11.
• Another difference is Dr Reddy raised repo rate from a high of 7.75% in beginning of Jun-08. By Jul-08 Repo rate was 9%. This time repo rates were raised from much lower level of 4.75% reached during crisis. So repo rate is still lower than high of 9% in Jul-08.

This strong persistence of inflation and not a great inflaiton record could have pushed RBI Governor into taking some highly hawkish measures. He has a great record in managing financial crisis, transparency but inflation record is where it matters most. Atleast for a central bank governor…