Inflation hits poor the most, RBI must listen to them:Subbarao

Reserve Bank of India has to listen to voices of the poor who are hurt the most by inflation, its former Governor Duvvuri Subbarao said adding that cutting interest rates is not necessarily the solution to stimulate investment.
Subbarao, who was at the helm from 2008-2013, noted that before every policy review, RBI consults stakeholders like corporate leaders, banks, NBFCs, financial sector participants, financial markets and economists and gets their views on what it should do, hinting that voices of the poor are not heard.
Recalling a meeting with 25 large corporate leaders during his tenure, he said he told them at the time that he would cut interest rates and asked how many of them would make investment decisions in the three months that followed.

"Not one hand went up. I am not saying they were wrong. Cutting interest rates was not necessarily the solution to stimulate investment, there were other constraints," Subbarao said.
He was speaking on the theme "Leading Reserve Bank of India: Challenges & Opportunities" while delivering the 8th B L Maheshwari Memorial Lecture at the Centre for Organisation Development here last night.
According to him, even if RBI had not invited them for consultations, the stakeholders would have anyway let their point of view known through other forums, like industry associations.

"But poor people are affected by inflation much more. Low income households are affected by inflation much more. Inflation hurts the poor the most. In the Reserve Bank, we don't call 50 poor people in the country to meet and say what they want to know.

First of all, they don't know RBI exists, and even if they do, they don't know the connection between interest rates and prices in the market. I believe the Reserve Bank as an institution...You have to bend over backwards to listen to voices of silence which do not get heard otherwise, which do not have other means of getting heard. They need a voice," Subbarao said.
Subbarao said Alan Greenspan, who served as Chairman of
Federal Reserve from 1987-2006, had said in his book that he used to get at least two letters from US Congressmen (Senators) every week urging cut in interest rates but never received even a single one requesting raise in interest rates because inflation is high.

"So, this constituency (poor people) which is affected by inflation does not get heard," he said, adding it's very important for central banks, particularly in a largely poor country like India, to be sensitive to "voices of silence".
Subbarao, who saw outbreak of the global financial crisis in September 2008 within days of assuming charge as RBI Governor, said managing exchange rate was the biggest challenge of his tenure.
"We had taper tantrums in 2013 when rupee depreciated by 17 per cent in three months," he recalled.
While managing global financial crisis and inflation were challenges, managing exchange rate, especially during 2013, was "by far a bigger challenge."

"...Because exchange rate was 'here and now' issue. Even during the global financial crisis, we had sufficient time to react but that is not the case with exchange rate...You have to respond. In real time, we had to manage exchange rate...Managing expectations about exchange rate is by far a bigger challenge," Subbarao said.
He noted that exchange rate would move even to stray bits of global news -distantly related or unrelated.