Former RBI governor D Subbarao reveals how he faced a challenging tenure riddled by an uncertain global economy, dark clouds in the domestic economy and a shaky relationship with the North Block
Who Moved My Interest Rate? Leading the Reserve Bank of India Through Five Turbulent Years
When Duvvuri Subbarao took charge as the 22nd governor of the Reserve Bank of India, within 10 days, Lehman Brothers collapsed, plunging the world in an unprecedented crisis. The governor, not even settled in the saddle, was tested by fire, and the RBI had to respond to the unconventional monetary policies of the advanced countries.
Subbarao’s tenure coincided with the most turbulent times since the Great Depression, from September 5, 2008, to September 4, 2013, and he repeatedly underscores in the book that central banking was a constant challenge during his tenure. While challenging situations arose on the global economic front, some embarrassments came from the government as well.
The author explicitly mentions that there was constant pressure on him to lower interest rates and on non-compliance, he was slighted, even at public functions, by the finance minister. In times of crisis, probably the need for trust, coordination, and synchronisation of policies and measures is very important and “walking alone” at that level, especially during crises, is not an option.
Recalling how P Chidambaram constituted a panel on liquidity management that infringed on the RBI’s autonomy, he writes: “I was annoyed and upset by this decision. Chidambaram had clearly overstepped into RBI turf.” In another instance, he writes how Pranab Mukherjee preempted him on a rate cut, telling those present in a business chamber meeting in April 2012 that “the governor will shortly give you good news” even before the announcement. Yet, with Manmohan Singh, with whom he had worked earlier, relations were cordial.
The book is replete with such interesting anecdotes and analysis of challenging situations. Illustratively, one such is quoted from YV Reddy, predecessor to Subbarao, “Everywhere around the world, the future is uncertain; in India, even the past is uncertain”, referring to substantial revision of data. Therefore, policymaking has to be done in the dark with unreliable data. There have been numerous cases of data wrong-footing that led to wrong policy decisions. Subbarao explains how doubtful data was the cause behind the stagflation puzzle encountered in 2012. These probably are the reasons that the Fed Reserve has the Beige Book and Bank of England has the Agent’s Report, which are available on real-time basis to supplement or contradict empirical analysis based on sophisticated econometric tools like dynamic stochastic general equilibrium models, which India is yet to acquire.
Though Subbarao joined the civil services with a postgraduate degree in physics, he sharpened his knowledge of economics at Ohio State, MIT and Andhra University, and also served in the Prime Minister’s Economic Advisory Council before assuming the charge of finance secretary in the finance ministry. Thus, his technical knowledge, understanding of economic issues and experience in policy management were sterling.
Divulging the nuts and bolts of central banking, the book explains the rationale for the policy initiatives that were undertaken by Subbarao. The explanations are in detail, threadbare and clear in their exposition. The book has 16 chapters in addition to the informative author’s note and an interesting introduction setting the context of the book.
Issues like inflation targeting have been dealt with in detail, covering various aspects from the view of a central banker. In an interesting observation, Subbarao emphasises that the meaning of the word ‘trust’, which gives a legal tender the strength of official currency in any country, implies preserving the value of currency by ensuring low inflation. The author argues that the RBI is concerned with growth, as with inflation, but believes that low inflation leads to better growth environment. He writes how he would often argue with the finance ministry that the debate in advanced countries could be fiscal austerity versus growth, but in India, it is fiscal austerity for growth. However, a contrarian view is that in a young demographic country, employment has priority over inflation, not hyper-inflation, because in a country like India, employment is a password for social status and obligations, and, most importantly, marriage. In fact, even observations like inflation erodes the savings of the elderly and hence always kept low need to be examined in detail through surveys, which are missing in India.
The author explains the processes of formulation of monetary policy, technical advisory committee, pre-policy interaction with the government, and policy outreach and dissemination. He also explains the RBI’s handling of the rupee tantrums of May 2013. As per the author, the current account deficit should always be kept in control, for it can manifest in different ways, anytime, into macroeconomic challenges. The author believes that building of foreign exchange reserves is an objective of exchange rate management, though he could not do it during his period because the time was not conducive. He writes how the then prime minister, Manmohan Singh, advised him to always “keep your ears close to the ground”, which he diligently did by working on financial inclusion, financial literacy and non-banking finance companies.
Subbarao has successfully continued to demystify the RBI, during his tenure as governor, as well as through this book. Though initiated, the RBI needs to extensively extend its strategy to provide non-technical summaries to their regular research outputs, preferably in major languages of India, he writes.
To conclude, doubtlessly, the honest and hardworking Subbarao would be remembered in the annals of economic history as the governor who never ‘swerved’ from the RBI’s dharma.
The book is a must-read for macroeconomists, not only in India, but in other emerging and advanced countries as well. It is also great reading material for historians of economic crises and multilateral institutions for the study of spillovers. Students of macroeconomics will benefit by getting a peek into the mind of a governor facing challenges while riding gigantic waves of uncertainty in the global economy, dark clouds in the domestic economy, and having a shaky relationship with the North Block.
The writer is RBI chair professor of economics at IIM Bangalore.
Views are personal