Taking a look at RBI Governor D. Subbarao’s report card..

A nice BS piece comparing performances of RBI Governors since 1990s across various macro parameters. This blog compared the performances across inflation a while ago.

By just looking at these macros, clearly Dr Subbarao’s performance is worse than his peers. The averages which should be up (GDP, forex reserves) are down and which should be down (inflation) are up. As BareTalk mentioned in his column — Subbarao has had the misfortune of having to serve under a government that has been the most incompetent

Though, I could not understand the interest rate used in the BS piece:

  • The graph  says  Bank rate was the main policy rate till 2000-01. Bank rate is the rate at which RBI provides discount finance to  banks.
  • Post 2000-01 (till May 2011) we had twin policy rates – LAF Repo and Reverse Repo. Post May 2011, we have had Repo rate as the main rate with  Reverse Repo and MSF rates kept -100 bps and +100 bps respectively from the Repo rate. This equation too has been broken with MSF at +300 bps from the repo rate. This was done to tighten rupee liquidity in the system.  Meanwhile sometime in 2012, Bank rate was pegged equal to MSF rate.
  • So the struggle is to compare the Governors across one policy interest rate. Hence Bank rate is taken which masks the picture. The rate shows policy rates were largely unchanged during Dr. Reddy’s and Dr Subba’s tenure which is not true.
  • For instance, Repo rate peaked at 9% under Dr. Reddy just before Lehman crisis. But the picture shows policy rate under Dr Reddy at 6% as Bank rate was kept at 6% for time immemorial.
  • Similarly, one does not know why interest rate is shown at 8.5% under Subbarao’s time. Currently Bank rate is at 10.25% (equal to MSF) and it was 8.5%. Bank rate was lowered from 8.75% to 8.5% in RBI’s Mar-13  policy as Repo was lowered to 7.5% (Hence MSF =Bank Rate = 8.5%). In May 2013, policy rates were lowered further to 7.25% leading Bank rate to 8.25% levels.
  • Bank rate remained at 8.25% levels till rupee saving measures came in Jul-13. Bank rate has been 10.25% since then.

So it is all confusing. A better approach would have been to take LAF rates atleast in Dr Reddy’s and Subbarao’s regime to provide more clarity. One could also use market rates like Call rates, G-sec rates but not sure whether we have daily data for a long time. Moreover, money market and bond market have developed considerably in last 7-8 years. Monetary transmission was weak earlier and has strengthened in recent years. So alternatives may also not be as good.

The changes might complicate the picture, but are needed to show the actual policy rates..

As Subba’s tenure draws close, there will be more such comparisons.  So more blogging to follow on the issue.

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