In a forthright "last public lecture" before he retires next week, RBI Governor D Subbarao was on Thursday sharply critical of the government, blaming its "loose fiscal stance" for the current economic woes, and warned that the root cause of rupee depreciation is "domestic structural factors."
While the speed and timing of the rupee's depreciation was due to the markets reacting to US Fed announcements, Subbarao said, "We will go astray, both in the diagnosis and remedy, if we do not acknowledge that the root cause of the problem is domestic structural factors."
He said it would be "misleading" to blame recent policy pronouncements of the US Federal Reserve for the decline in rupee, which has slid 23 per cent against dollar this fiscal.
"...there has been a growing tendency to attribute all of this (ferocity of rupee depreciation) to the 'tapering' of ultra easy monetary policy by the US Fed. Such a diagnosis, I believe, is misleading," he said in his last public lecture as RBI Governor.
While some of the growth slowdown was attributable to the RBI's monetary tightening, he said, "India's economic activity slowed owing to a host of supply-side constraints and governance issues, clearly beyond the purview of the RBI."
Blaming the "loose fiscal stance of government during 2009-12" for slow growth and high inflation, he said, "Had the fiscal consolidation been faster, it is possible that monetary policy calibration could have been less tight."
The governor has often been criticised from within the government for his tight money policy at the cost of growth. The root cause behind the rupee's decline, he said, is a current account deficit that's running well above the sustainable level for three years in a row and may possibly continue at that level for the fourth year this year.
The only lasting solution is to reduce the current account deficit (CAD) to a sustainable level, he said.
"Reducing the CAD requires structural solutions - RBI has very little policy space or instruments to deliver the needed structural solution. They fall within the ambit of the government."
Subbarao, however said, that in the interim "we need to stabilise the market volatility, a task that falls within the domain of the Reserve Bank."
The government aims to bring down the CAD, which touched a record high of 4.8 per cent of GDP in 2012-13, to 3.7 per cent of GDP (USD 70 billion) this fiscal. GDP growth slowed to a decade low of 5 per cent in the last fiscal. The RBI has pegged growth at 5.5 per cent in this fiscal.
Sacrificing growth on account of high interest rates was only for the short term, Subbarao said. "...RBI had run a tight monetary policy not because it does not care for growth but because it does care for growth."
The rupee, which closed yesterday at a record low of 68.80 against the dollar, gained 225 paise to 66.55 today. Subbarao said it is the RBI's "avowed policy" not to target an exchange rate and it has stayed true to that policy.
"Our efforts over the last few years, particularly the last three months, have been to smoothen volatility as the exchange rate adjusts to its market-determined level so as to make the near-term cost of adjustment less onerous for firms, households and banks," he said.
Referring to criticism that the RBI's measures have been confusing and betrayed a lack of resolve to curb volatility, Subbarao said, "Let me first of all reiterate that our commitment to curbing volatility in the exchange rate is total and unequivocal."
He, however, admitted the RBI could have communicated the rationale of its measures more effectively.
"But our actions were consistent. Our capital account measures were aimed at encouraging inflows and discouraging outflows. Also, we tightened liquidity at the short end to raise the cost of short-term money so as to curb volatility," he said.
At the same time, he added, the RBI wanted to inhibit the transmission of the interest rate signal from the short end to the long end as that would hurt the flow of credit to the productive sector of the economy.
"...it is not the policy of the RBI to resort to capital controls or reverse the direction of capital account liberalisation," Subbarao stressed. The RBI's measures did not restrict inflows or outflows by non-residents, he added.