Former Reserve Bank of India (RBI) Governor D Subbarao on Friday said he accepts the responsibility of building up of non-performing assets (NPAs) during his term as the RBI chief between 2008-13, a period coinciding with the global financial crises (GFC).
“It is very difficult to identify a bubble in real time, not just in India but proven by experience. If it was possible for anybody to identify a bubble building up in real time, we would never had a crisis,” he said at an event held at NSE here.
“I accept the responsibility for the build-up of NPAs which started in my tenure as the RBI Governor. Not so much to defend myself, but to explain, it is difficult to identify a bubble because there is always a worry that you are anticipating a problem which does not exist,” he said.
He said while financial system can withstand pressure much longer than people expect it to, when pressure builds up to a point where implosion happens, it is catastrophic and this is the broad nature of financial system.
He said that regulator cannot take strict actions just because of the fear that NPAs are building up, as it hurts the credit growth. During his term as RBI chief, there were many reasons attributed for higher NPAs, but crony capitalism was just one of the factors among them. He stated that then government did not exert pressure on the RBI to prop up loan growth.
FIT model sustainable
Subbarao said while there are talks about the effectiveness of the RBI’s flexible inflation targeting (FIT) mechanism, the model has served its purpose well in targeting inflation.
The objectives of monetary, he says, are price stability, growth and financial stability. But these three objectives do not land pari-pasu. Price stability takes priority over growth and financial stability. Under the current FIT, if inflation is beyond the target range of 2-6 per cent, the primary responsibility of central bank is to bring inflation to target range. Once the inflation is in target range, the central bank is enjoined to keep in view financial stability and growth concerns.
The criticism against FIT has been that in its obsession of delivering targeted inflation, the RBI is sacrificing growth.
“I don’t think that we must throw away the baby with the bath water. I worked in a pre-FIT framework, and I believe FIT has been a force for the good…But we should see how to marry concerns of growth and inflation and how to manage the trade off.”
In short term, while rate hikes reduce growth, in the longer term, lower and steady inflation is necessary for growth. On debate around removing food inflation from the CPI index, he said food inflation plays a major part on household inflation expectation on ground.
“The other debate has been…around core inflation and headline inflation. There is a problem about the appropriateness of the CPI basket, it needs to be revised. But the fact remains, that food is a big component of India’s inflation basket…it is food inflation that are experienced in market everyday. It sets market expectation. To believe that RBI must target an esoteric number that people don’t related to, abandon food inflation, it is not correct.” He also said that India’s GDP growth slowdown is largely structural, and partly cyclical in nature.