The central government should have used the period of easy global liquidity to fix the structural supply constraints, which eventually drove up the current account deficit (CAD), in order to make the country more resilient to the expected tapering of quantitative easing by the US,

said Reserve Bank of India (RBI) governor D Subbarao.

?Had we used the breathing time that this gave us to address the structural factors and brought the CAD down to its sustainable level, we would have been able to withstand the taper. In the event, we did not,? Subbarao said in his last public address as RBI governor.

He added that while the speed and timing of rupee?s depreciation may be linked to the US Federal Reserve’s plan to taper it’s quantitative easing programme, the root cause of the currency weakness lies in domestic structural factors.

Throwing the ball in the government’s court, the governor said the only

lasting solution to the country’s external sector concerns is to reduce the CAD. ?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 said.

The governor, who retires in a week, said that stemming volatility in currency markets falls within the ambit of the central bank and admitted the RBI could have communicated the rationale of its recent measures more effectively.

Subbarao, however, defended the thinking behind the recent measures and reiterated that the RBI does not intend to resort to capital controls.

?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. At the same time, we wanted to inhibit the transmission of the interest rate signal from the short end to the long end as that would hurt flow of credit to the productive sector of the economy. So, we instituted an Indian version of ?operation twist?,? he said.

The Indian rupee has become the worst performing global currency this year and has weakened by a massive 20% in just five months. Recent RBI measures to stem the fall in the rupee has had little effect, with the currency plummeting to a record low of 68.82/$ on Wednesday. The rupee rebounded on Thursday after the RBI announced a swap arrangement to provide dollars to oil companies directly.

Outlining the challenges to be faced by his successor Raghuram Rajan, Subbarao chose to focus on the issue of autonomy and accountability of the RBI.

The central bank must safeguard its autonomy but at the same time the processes for its accountability can be

beefed up, said the outgoing governor.

Subbarao said the current arrangement wherein the RBI governor is summoned by the Parliament standing committee whenever required is inadequate. The governor suggested the RBI chief present a report on the central bank’s policies twice a year to the committee and answer any questions by its members.

?In my view, this will not only secure the accountability structure but also protect the Reserve Bank from any potential assaults on its autonomy,? Subbarao said.

He, however, once again disagreed with the suggestion made by the Financial Sector Legislative Reforms Commission that the RBI’s mandate be restricted.

As a parting shot, the RBI governor referred to the media coverage over perceived differences with the finance minister and quipped, ?Schroeder, the former German chancellor, once said, ?I am often frustrated by the the Bundesbank. But thank God, it exists?. I do hope finance minister Chidambaram will one day say, ?I am often frustrated by the Reserve Bank, so frustrated that I want to go for a walk, even if I have to walk alone. But thank God, the Reserve Bank exists.?