I somehow keep forgetting to write on this so thought of connecting two stories.
RBI Governor, Dr. Subbarao’s tenure was recently extended by 2 years by Govt. of India.
Commenting upon his re-appointment, Dr. Subbarao said, “I am happy that the Government has reposed its confidence in me at this difficult juncture in the world economy. I look forward to working with a great team in the Reserve Bank to meet the many challenges ahead.”
Markets took it positively saying in times of uncertainty. Some said in absence of reforms, this was a good move showing continuity and not keeping markets guessing. As we know, mon pol decisions in RBI are taken by Governor (though advised by TAC), so it was important to keep things going rather than have a new man at help.
Few comments/articles:
- Coming into his own as a central banker
- Central bank rerun
- Subbarao starts another long haul
- Stability in crisis: RBI chief gets extension
- Economists welcome Subbarao’s extension
- Firefighter Subbarao gets 2 yr extension as RBI guv
My view is a single thumbs up for the numerous initiatives he has taken to improve transparency at the central bank. Yes, some measures like having four more mon pol meetings makes things complicated but that is always the case with transparency. Now we have mon pol live on TV as well. RBI is a very different central bank with press releases for small events and clarity. Even research has improved under him with working papers (though this could be due to Dep Gov Gokarn as well).
His major problem has been ugly inflation which just gets uglier. He holds a dubious record of having worst inflation figures under his tenure. Despite all that improvement in transparency etc, any central bank governor wants a great (if not the greatest) inflation record.
So in a way this extension will help him get that record straight. His two shockers in May-11 and Jul-11 policy should help control inflation after being accused of being behind the curve. He suddenly looks to be leaping now (though some say still behind the curve).
Now to the second part of the post.
However, inflation is unlikely to leave him soon. Headline inflation numbers are already at the level RBI expected in May-11 policy despite not much rise in oil prices, limited deregulation of oil sector etc.
And then inflation expectations measures by HH survey just keeps going up. Latest survey for Apr-Jun 11 shows people still expect inflation to rise.
The current round of the survey shows that the threemonth ahead inflation expectations of households have tended to be slightly lower at 11.8 per cent from 11.9 per cent in the last round of survey but one-year ahead inflation expectations have moved slightly higher at 12.9 per cent from 12.7 per cent. The survey findings indicate that households expect inflation to rise further by 60 and 170 basis points during next three-month and next one-year period respectively, from the perceived current rate of 11.2 per cent.
The percentage of respondents expecting price rise have gone up for all product groups (viz., food, non-food, household durables, housing and services). However, expectations on general price rise were mainly influenced by movements in food prices. On category-wise inflation expectations, daily-wage workers and housewives expected higher inflation rates compared to other categories. Across the cities, Bangalore expected the highest inflation while expectations were the lowest for Hyderabad. 25 per cent of the respondents felt that RBI is taking necessary action to control inflation, of which, 51 per cent felt that RBI’s action has an impact on controlling inflation.
Moreover, people expect inflation to be higher an year ahead from current levels. So they don’t think any of the current measures are helping. As it is a household survey not many are aware of RBI actions (the survey shows only 25% believe RBI is taking any action), but they must be believing nothing much is being done to monitor inflation by anyone. So it will continue to rise.
As they keep saying, don’t let inflation get entrenched in expectations. Unfortunately, this is what has happened for India.
Lately policymakers are saying inflation is due to global reasons. One can only laugh at that. Thanks to EME growth rates of which India is a major part, prices are rising due to limited world supplies. So global inflation is rising dues to India as well.
And hang on. it just doesn’t end there. They also say India will not be impacted due to global recession as we are more insulated from global forces and it is a domestic economy. Well, you cannot have both the cases in your favor…And we hear these statements from respected economists and names which makes it even worse and funny…
Mostly Economics 
