With the Indian economy passing through the best and possibly the worst phases in the last decade, the role of the Reserve Bank of India has always been in the heart of all debates. The two governors YV Reddy and D Subbarao have many things in common ? both are from Andhra Pradesh and were bureaucrats in finance ministry before heading to Mint Street ? but confronted different challenges during their stint. During Reddy stint, the economy was on a roll with GDP growth averaging 8.5%, inflation at less than 5.5% and foreign exchange reserve at all-time high of $299 billion. Still, Reddy maintained a tight monetary stance fearing the economy was ?over-heating?, which invited criticism from some sections of the government. However, Reddy’s stance was later proved right as the Indian banking system remained unscathed by the Lehman crisis and RBI could quickly unroll a monetary stimulus to help the economy weather the global crisis.
By contrast, Subbarao had to start his career at RBI as a trouble-shooter ? the banking system was facing a credit squeeze, foreign investors were pulling out their funds from India, exports were down to a trickle and growth rate plunged to 6.7% in FY09 from 9.3% in FY08. After inflation started rising since FY11, Subbarao responded by aggressive rate hikes which many believe has made things worse by hurting growth without fixing inflation for a long time. Others argue rate cuts alone couldn?t have helped revive growth. The debate continues but there is little doubt Subbarao was dealt a tough hand.