If not for anything else, Subbarao regime at RBI will be remembered for his relentless fight for the bank’s independence
Mumbai: If not for anything else, the D. Subbarao regime at the Reserve Bank of India (RBI) that ends with his retirement on Wednesday will be remembered for his relentless fight with the finance ministry for the central bank’s independence.
His predecessor Y.V. Reddy too was involved in similar fights—which were more severe than an India-China war, a colleague of Reddy says in jest—but the details are not in the public domain. Also, Reddy’s run-ins with the finance ministry were more on specific issues while Subbarao fought on broader policy issues.
Unlike Reddy, who was also a civil servant, Subbarao’s passage to Mint Road from the finance ministry in 2008 was direct. He was given preference over Reddy’s deputy Rakesh Mohan for the top job. In that sense, he was seen as a Trojan horse, so his fights with the ministry have been baffling.
The first came to the fore on the constitution of the Financial Stability and Development Council. Ahead of that, an 18 June 2010 ordinance empowered the finance ministry to resolve all disputes between the regulators. Subbarao immediately wrote to the then finance minister Pranab Mukherjee, saying “the appearance of autonomy is as important as the actual autonomy itself”, and “the very existence of a joint committee (the council) will sow seeds of doubt in public mind about the independence of regulators”.
“The establishment of a statutory joint committee is itself problematic and raises issues about its potential misuse in ways that impair the autonomy of the regulators,” Subbarao wrote. “…The ordinance has seeming implications for regulatory autonomy and sows seeds of doubts where none exist. My earnest request to you is to allow the ordinance to lapse. If that option is not acceptable, the portion of the ordinance relating to the RBI Act may be deleted.”
Mukherjee did not pay heed.
This is one of the many issues on which the governor did not see eye to eye with the government. He has also not been comfortable with the idea of divesting RBI of its debt management function and has strong reservations on the report of the Financial Sector Legislative Reforms Commission, which has proposed taking away many of RBI’s functions.
Subbarao's belief is that it’s the responsibility of the governor to speak up. In that sense, he is a keen follower of one of his predecessors, economist I.G. Patel (December 1977 to September 1982) whose advice was something on these lines: “Don’t nitpick. Pick your battles. Once you have picked your battles, fight those battles valiantly.”
But even while fighting for the central bank’s freedom and autonomy, Subbarao religiously met the finance minister and Prime Minister to keep them abreast of what the central bank would do before every quarterly review of monetary policy—a ritual symbolic of RBI’s lack of true independence.
Of course, he could have done that in stealth—say meeting the finance minister at his residence at night or avoiding the main gate when entering North Block, where the ministry is housed, to dodge the media—but Subbarao did not want to deviate from the tradition of revealing the content of the policy to the government ahead of making it public.
Historically, RBI governors keep the finance ministry informed of the policy decisions before announcing them; Subbarao kept the Prime Minister also in the loop. Another person who is perceived to be close to Subbarao is former RBI governor and now chairman of the Prime Minister’s Economic Advisory CouncilC. Rangarajan. Subbarao had worked for the council between 2005 and 2007 before becoming India’s finance secretary.
Manmohan Singh’s advice
Before he took over as governor of RBI in September 2008, Subbarao met Manmohan Singh for his advice. The meeting turned out to be more than a formality. Singh, who was an RBI governor between September 1982 and January 1985, told him that in RBI one runs the risk of losing touch with the real world with the mind space fully taken up by issues like interest rates, liquidity traps and monetary policy transmission. But monetary policy is about reducing hunger and malnutrition, creating jobs and building roads and bridges. So, it is important to keep one’s ear to the ground.
Singh also told him to stay in touch and make deputy governor Mohan feel at home. Mohan was a contender for the governor’s post. He left a few months after Subbarao took over.
Mohan was in Jackson Heights, New York City, on an official trip when Chidambaram’s office called him for a formal interview for the governor’s post in August 2008. As finance secretary, Subbarao had the ambition to be the RBI governor (for many of India’s past finance secretaries, RBI governorship was a logical career progression) but till mid-August, when he applied for a week’s leave to visit Hyderabad, he was not sure about getting the job. On 26 August, a few hours before he was to catch a flight to Rio de Janeiro to attend a G-20 meeting, he got a call from Chidambaram, enquiring whether he would be interested in the governor’s job. Being the senior-most IAS officer, Subbarao was in line for the cabinet secretary’s post, which is hierarchically one notch above the governor’s position. At 8pm that evening, he met Rangarajan and Chidambaram at the latter’s house before he left for the airport to catch a 1am flight.
The half-an-hour interview turned out to be more a sort of business meeting where the three discussed many things. Chidambaram asked his views on having a monetary policy committee at RBI. Subbarao was not in favour of such a committee as he felt its presence would constraint the governor’s decision-making power. Chidambaram was of the view that the governor’s job is very much like the job of a corporate CEO who would need to take the board along with him but Subbarao disagreed. By the time he returned to Delhi after the G-20 meeting on 2 September, the Prime Minister had signed off on his appointment.
Ground realities
Subbarao took Singh’s words seriously. He instituted the outreach programme at RBI which takes senior officials of the central bank to remote rural pockets of India so they can stay in touch with the real world. One of the objectives of such outreach programmes is financial inclusion, which means expanding banking services to the unbanked poor. Beyond that, Subbarao wanted his team to get a first-hand understanding of the ground realities, visiting village councils, rural schools and non-governmental organizations. This is one of the many changes that he made at RBI during his five-year tenure.
Among others, he introduced mid-quarterly reviews of monetary policy and giving guidance on which way policy was leaning. He included academicians and economic journalists in RBI’s pre-policy consultations, simplified the language of the central bank’s reports and press releases and introduced a conference call with analysts after every monetary policy.
In an interview in July 2009, he listed three things that he would like to achieve as RBI governor—acquiring greater proficiency in managing monetary policy in a globalized context; making RBI more transparent; and demystifying the office of the governor. “I want our staff to understand that even governors do not know everything, that they have to make judgement calls in a context of uncertainty when the pros and cons of their actions are not completely clear.”
He has succeeded in making RBI more transparent and demystifying the governor’s office but possibly fallen short in managing monetary policy in a globalized context. Indeed, the governor makes judgement calls in uncertain economic situations and many believe that a few of Subbarao’s calls have gone wrong.
Arvind Panagariya, professor of economics at Columbia University, describes the Subbarao regime as one of the worst in the history of RBI. In an interview with The Indian Express editor Shekhar Gupta in his weekly Walk the Talk programme on NDTV, Panagariya said RBI made a “huge mistake” in not building up dollar reserves when the rupee had appreciated sharply in 2009-10. The rupee rose 4.9% against dollar in 2009 and 4.07% in 2010.
Its slide started in 2011 when the local unit lost 15.75%. In 2012, it slipped 3.51% and since January the depreciation has been around 17%. His predecessor Reddy bought dollars from the market as he had a problem of plenty—too much of foreign money was pouring in. In fact, he had to drain rupees generated out of dollar buying from the system by selling bonds under a special scheme.
There are some who find the criticism unfair as by not buying dollar from the market Subbarao merely stuck to the RBI policy of intervention only to iron out volatility in the foreign exchange market and not adding to the dollar reserves. But then, it is up to the governor to follow the policy or change it.
Behind the curve
Another criticism against Subbarao is that he had always been behind the curve—for far too long he followed an accommodative monetary policy and allowed government bond yield to remain below the inflation level. In other words, he was slow in raising rates and as a result of this, inflation surged. Originating from supply-side problems, inflation became generalized and entrenched and it took years to tame it.
True to his wont, Subbarao admitted this. Delivering the 10th Nani Palkhivala Memorial Trust Lecture in Mumbai last week, his last public appearance before he steps down as RBI governor, Subbarao said, “With the benefit of hindsight, I must admit in all honesty that the economy would have been better served if our monetary tightening had started sooner and had been faster and stronger.” Not too many governors have had the guts to admit policy mistakes.
His handling of the rupee depreciation since May has also drawn much flak for lack of consistency and coordination with the government and a string of half-hearted attempts that destroyed markets’ confidence in the regulator.
Criticism is not uncalled for but one also needs to appreciate the context in which Subbarao functioned as India’s chief money man. A 1972-batch Indian Administrative Service officer of the Andhra Pradesh cadre (he was the topper in his batch), he took over barely one-and-a-half weeks before US investment bank Lehman Brothers Holdings Inc. collapsed and the world plunged into an unprecedented credit crisis.
For the first one year, he worked closely with the government, cut policy rates to a record low, and flooded the system with money to ward off the impact of the liquidity crisis that swept the world. Too much of money led to a rise in inflation so he had to reverse the trend and started raising interest rates and tightening monetary policy, albeit slowly—a quarter of a percentage point at a time. In December 2009, a little over a year after he took over, the wholesale-price inflation crossed the 7% level, much to the discomfort of the central bank, stayed put at that level and rose even higher till March 2013. Between March 2010 and October 2011, he increased the policy rate a record 13 times.
By the time RBI came close to bottling up the inflation genie, the rupee started depreciating, the inevitable fallout of a record high current account deficit and the US Federal Reserve’s announcement that it would wind down its bond buying programme, which led to a flight of capital from emerging markets. All of a sudden, Subbarao had to reverse his softening stance and go for draining liquidity and raising short-term rates in defence of the local currency.
Unlike in 2008, when RBI and the Indian government had coordinated monetary and fiscal measures to ward off the impact of the global liquidity crunch, there was virtually no coordination between RBI and the finance ministry in 2013. The differences between the two were pretty obvious on various occasions, ranging from how long RBI’s liquidity tightening measures would be in force to issuance of sovereign bonds to bolster India’s foreign exchange reserves.
Growth vs inflation
Subbarao is one governor who also got embroiled in the growth-versus-inflation debate, with the ministry perceived to be pushing for growth and RBI to contain inflation. In a July 2009 interview, he had said on top of his agenda was “returning the economy to a high-growth path”. He took pains to clear the misconceptions, saying from various forums that indeed RBI cared for growth and that’s why it fights inflation.
In his speeches and policy documents, the increasingly frustrated governor has time and again blamed the government for not doing its bit on the fiscal front and not addressing structural issues. He also expressed his helplessness—after all, monetary policy has its limitations and it needs fiscal policy to move in tandem.
To his credit, ahead of others, RBI was the first to flag India’s precarious balance of payment situation in late 2010.
In his five-year stint, Subbarao raised the policy rate 13 times and cut it 10 times, making it a record 23 changes in interest rates—the most by any governor in RBI’s 78-year history. Will he be remembered for that alone?
Among his predecessors in the post-reforms era, Rangarajan is remembered for his monetary tightening to fight an entrenched inflation and abolition of the government’s automatic monetization through ad hoc treasury bills; Bimal Jalan, for protecting India from the contagion of the East Asian currency crisis in the late 1990s and taking the first steps towards capital account convertibility; and Reddy for insulating the Indian financial system from the impact of the global financial crisis.
People who know Subbarao well say he is a perfect host who personally looks after every guest at every function that he holds. He is also a voracious reader of non-fiction—not necessarily books on economics.
He also prepares himself well for every meeting and every speech. He writes his own speeches and revises them again and again till he is satisfied, something which he does with monetary policy documents as well. The fact that he is not a monetary economist was a handicap for the first six months of his tenure, but he overcame that through extensive reading. In his college days he was a member of the Mensa Club—the world’s largest and oldest high IQ society—and knows how to ask the right questions.
Inflation and haircut
Speaking at the Sixth Annual Statistics Day Conference in July 2012, Subbarao said he used to pay Rs.25 for a haircut 20 years ago, which went up to Rs.50 even as his hair thinned. “Now when I have virtually no hair left, I pay Rs.150 for a haircut,” he said. “I struggle to determine how much of that is inflation, how much is the premium I am paying to the barber for the privilege of cutting the governor’s non-existent hair.”
In yet another barber joke, once in Delhi, he had said that while cutting his hair, his barber kept discussing inflation. Asked about his interest in inflation, the barber told him that every time he uttered the word inflation, it made Subbarao’s hair stand on end, making his own job easier.
Leaving office, Subbarao may take some comfort from the fact that both wholesale price inflation and so-called core inflation, or non-food, non-oil, manufacturing inflation, are relatively low. Retail inflation still continues to be high. Some say that as a governor Subbarao has been singularly unlucky. He took over less than a fortnight before the collapse of Lehman Brothers and he leaves days before the Federal Reserve announces a plan for winding up its economic stimulus programme. One also must consider the fact that Jalan had Reddy as his deputy and Reddy had Mohan as deputy to help them decide on monetary policies; Subbarao hasn’t had a deputy of their stature.
In a lighter vein, Subbarao once said that the end of the global economic crisis would coincide with his term coming to a close. Indeed, the US economy is in recovery mode and the euro zone crisis is nearing its end, but India is facing a currency and economic crisis of rare dimensions as he prepares to step down.
Had Subbarao stepped down in May, his legacy would have been different. In September 2008, when he took up the assignment, India was one of many countries hit by the global credit crunch. But the currency crisis is mostly India-specific and tackling it has been Subbarao’s biggest challenge in his entire career. He hasn’t met the challenge with aplomb. Does that mean his has been the worst tenure at RBI? As they say, a governor should be judged over a cycle and not when he leaves.
For the record, after retirement Subbarao, 64, will relocate to Hyderabad, the city which hosts at least two other past governors—Reddy and M. Narasimham (Rangarajan too spends time in the city)—and join the academic world.
