Former RBI Chief Subbarao Urges Transparency In Policy Stance Communication Amid Uncertainties

Former Reserve Bank of India Governor D Subbarao on Tuesday said it is critical for the central bank to communicate clearly how it views the current economic situation and how it plans to respond, ahead of its upcoming monetary policy decision.

Subbarao said it was not enough for central banks to focus only on policy action. He said it was equally important for the RBI to provide guidance to markets and the public to build confidence, especially during times of economic uncertainty.

“I can say it from my own experience… for the Reserve Bank of India in particular, at a time like this, apart from what they do in terms of policy action, it’s also very important… to communicate clearly how they see the situation and how they’re going to react to it,” Subbarao told NDTV Profit in an interaction. “Giving guidance to the markets and to the larger public and reposing confidence at a time like this is very important.”

The comments came ahead of Monetary Policy Committee’s interest rate decision, which is scheduled on Wednesday. All economists polled by Bloomberg expect the MPC to cut the rate, at least by 25 basis points.

Subbarao said the decision this time is more difficult than in February, when the RBI reduced the repo rate by 25 basis points. He noted that inflation then appeared benign, the rupee had adjusted, and there were concerns about growth slowing.

“Today, it is very uncertain,” the former central bank chief said, adding, “There is inflation — so far it is benign — but we can never take inflation in India for granted.” He also said growth would be affected by tariffs and weaker exports, particularly if a global recession follows.

Subbarao said that in emerging economies such as India, monetary policy must also factor in capital flows and exchange rate stability. Unlike advanced economies, which juggle inflation and growth, India must also maintain financial stability. He called this a challenge of managing the “impossible trinity.”

Separately, commenting on stock market volatility, Subbarao said the government should not intervene to protect investors who have lost money.

“I saw some reports that there is a lot of pressure on the government to come to the support of people who have lost money in the stock market,” he said. “I don’t believe the government has anything to do with this, because volatility is an integral part of the stock market.”

The comments came amid a correction in Indian equity benchmarks, with the Sensex and Nifty currently trading around 13% below from their record highs reached in September 2024. The downturn is primarily attributed to uncertainties surrounding the escalating tariff wars, which intensified after Donald Trump began his second term as the US president.

Additionally, prolonged selling by foreign investors and disappointing quarterly earnings have contributed to the market's decline.

Subbarao said investor risks come with the possibility of rewards and warned against creating a moral hazard by rescuing people who have lost money. “The implicit assumption behind this is that the government is sitting on an infinite amount of money and there is no cost.”

He said taxpayers who are not investing in markets would end up bearing the cost if the government acts to support investors. “There is a cost to doing that, and that cost is being paid by the entire economy,” he said.