Who moved my interest rates, the tell-all book by former Reserve Bank of India (RBI) governor, Duvvuri Subbarao, who preceded Raghuram Rajan at the central bank, is only a formal account of what is already known in public —how the Congress-led UPA clipped the wings of the central bank and often overstepped into its territory playing the big boss.
During his tenure in the RBI ( 2008-2013), Subbarao was known as a ‘consensus man’. The soft spoken, ever-smiling former governor always welcomed opinions on crucial issues including RBI’s monetary policy from anyone— be it from his colleagues at RBI or a journalist who interviewed him.
What is your opinion?
A question, “So, what you think on this?” was normal line from Subbarao. Every time a journalist asked the then RBI governor about the rumored friction between the central bank and the finance ministry, Subbarao largely played down the issue. Even Subbarao’s predecessor, Y V Reddy, had had his run-ins with the government; but both have chosen to describe the differences as ‘creative tensions’ bound to happen between the two institutions on account of varying perspectives. Moreover, whenever such questions were raised, the RBI governors, time to time, explained that the RBI wasn’t meant to be a fully autonomous institution since the law that governs it makes the institution answerable to the government.
But, everyone knew that there were serious differences between both institutions—the central bank and the government—way beyond the definition of ‘creative tensions’. Those differences often took the shape of an ugly turf-war. The governments always considered the central bank an institution subservient to its broader interests and whose jurisdictional authority and operational autonomy can be questioned at any point of time by the political regime, which hasn’t really changed even today. There are several examples for this in the past and has been widely discussed in the media. What Subbarao’s tell-all book reveals, in that sense, is only a formal account of what is already known in public. Nevertheless, the revelations assumes great significance since not many former RBI governors have dared to speak the truth against the governments either during their term or after that.
Trampling over RBI
There are a few instances Subbarao points out in his book to testify how the UPA-government trampled the autonomy of the central bank during his term and how unhappy he was about such interventions.
One such instance, Subbarao points out, happened when the then finance minister P Chidambaram suo moto constituted a liquidity management committee with the finance secretary as its chairman. “I was annoyed and upset by this decision. Chidambaram had clearly overstepped into RBI turf," Subbarao says in the book. The RBI decided against being a part of that panel though the government sought its representation.
Another major instance Subbarao highlights occurred in April, 2012, when the then finance minister, Pranab Muherjee almost announced the monetary policy an hour before the central bank announced the policy.
That was a time when Subbarao cut the repo rate (at which it lends) to 50 basis points, after hiking it some 13 times. “(Then) finance minister Mukherjee was scheduled to address a business chamber in Delhi an hour before the policy release time. As he was entering the meeting hall, he commented informally to the corporates and the media that surrounded and greeted him that "the governor will shortly give you good news". This was most inappropriate and indiscreet. I am positive that the finance minister did not intend any mischief; nor did he want to undermine the RBI. I think he was just being naive, overanxious to be the bearer of good news to the corporates in the midst of widespread criticism of policy paralysis in the government hoping that some of the credit for this would rub off to him," Subbarao said in the book.
Also, Subbarao outlines two instances when he had run-ins with the government on the reappointment requests of former deputy governors—Usha Thorat and Subir Gokarn, despite both having merit for extension. In the case of Thorat, Subbarao recounts, “Usha became part of the price we had to pay for asserting the autonomy of the central bank,” while in the case of Gokarn, “The reason he (the former finance minister) gave was that all of us who entered the RBI laterally had become hostage to the technocrats in the RBI and the government felt it necessary to bring some fresh thinking," Subbarao said.
What did Mukherjee mean when he said RBI top brass became hostage to the institution? Does it mean that they were still supposed to give priority to the interests of North Block above that of the central bank? One can read between the lines here.
The Chidambaram-Subbarao differences on policy matters became open when Chidambaram publicly said in October, 2012 that, “Growth is as much a challenge as inflation. If the Government has to walk alone to face the challenge of growth, then we will walk alone.” This statement came within hours after Subbarao, the then governor, refused to cut the policy rate despite public demand in the half-yearly review of the monetary policy, to continue with the fight over inflation.
Besides the above instances, there were also differences between North Block and Mint Road on issues of separation of debt management from the central bank--one of the core functions of the RBI at present and something that has critical importance in the liquidity management in the banking system and on the issue of creation of a new monetary policy structure.
Importance of memoirs
Beyond past instances, Subbarao’s revelations have crucial importance in the current context as well, when the government-central bank relation has yet again made headlines in the wake of RBI governor Raghuram Rajan’s surprising exit statement last month.
Rajan’s farewell letter came after a series of personal attacks from BJP leader, Subramanian Swamy targetted at the present central bank governor's personal integrity and efficiency in the running of monetary policy operations. Swamy accused Rajan for not being ‘fully mentally Indian’ and ‘wrecking’ the economy with high interest rates and thus causing unemployment.
With the BJP government remaining non-committal to Rajan’s extension beyond this September, the former chief economist of the International Monetary Fund (IMF) made public his decision not to continue at the central bank beyond his term. But, Rajan’s critics blame him for overstepping his mandate and commenting on political issues.
The larger point here is the efforts to undermine the central bank’s autonomy in matters pertaining to its constitutional mandate (as evident in Subbarao’s account) by the UPA-government and the subsequent episodes in the NDA-regime does not augur well for India’s image. It can even be detrimental to the country's chances of emerging as an economic superpower.
In a highly integrated world economy, foreign investors attach high value to the credibility and independence of the central bank . Subbarao’s book is a testimony of how the government- RBI relations turned ugly between 2008 and 2013.
The events that succeeded during Rajan’s time show the continuing vulnerability of RBI to political attacks. While there was a clear overstepping into RBI’s territory during Subbarao’s time, it’s the manner in which Rajan had to go that worries one in the recent times.
Subbarao’s book is a message and a reminder to the Narendra Modi-government that it should acknowledge central bank’s constitutional importance and not repeat the mistakes of the past.