The timing of former RBI Governor Duvvuri Subbarao’s book is fortuitous since it comes on the heels of current Governor Raghuram Rajan calling it quits and on the eve of his successor being announced. All those horrified by the way Rajan was treated would do well to read ‘Who moved my interest rate?’. At even the height of the supposedly poor relations between the government and Rajan, it was never as bad as what Subbarao describes during the UPA years. Finance minister P Chidambaram’s very public rebuke is well known – when RBI did not cut rates in October 2012, he said, “If the government has to walk alone to face the challenge of growth, then we will walk alone”. Subbarao talks of how Chidambaram set up a committee on liquidity management and asked RBI to nominate a representative though this was clearly RBI turf. There was the time when the appointment letters of RBI directors were reworded to say ‘until further notice’ and the decision not to give extensions to key deputies Usha Thorat (at that point, Pranab Mukherjee was the FM) and Subir Gokarn despite Subbarao asking for this was another way to check the Governor – at a dinner hosted by the Indian ambassador in Mexico, Subbarao talks of how Chidambaram pointedly ignored him. He also talks of, amazingly, how prime minister Manmohan Singh asked former RBI Governor C Rangarajan to convey his dismay over Subbarao’s strident stance on the high fiscal deficit.
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More than autonomy, the question is whether Subbarao was a good Governor. Certainly, with Lehman, the various rounds of QE, the European crisis and the taper tantrums, he had more than his fair share of crises to deal with. Indeed, when the rupee was under attack in 2014, the plan to allow forex swaps where half the cost would be borne by RBI was actually Subbarao’s, but he graciously allowed Rajan to announce it since he felt the incoming Governor doing this would have a bigger impact. Subbarao has also come in for a fair amount of stick for allowing inflation to take root and, later, letting the rupee slip. The 400bps rate cut post-Lehman (from 9%, the repo was down to 5% by March 2009) was excessive considering WPI was 8% and CPI 9% in FY09, but the post-Lehman panic had most central bankers reacting the same way – indeed, the government did its own stimulus and the deficit ballooned from 2.5% of GDP in FY08 to 6% in FY09. Similarly, while WPI remained elevated at around 10% in all of calendar 2010, Subbarao raised repo from 5% in March 2010 to just 6.5% in January 2011, and in seven baby steps – since this still left real rates negative, inflation shot rose from 3.6% in FY10 to 9.6% in FY11 – Subbarao was then forces to raise the repo by 50bps each in May and July 2011. To be fair, with the fisc and the CAD out of control and the government increasing MSPs by large amounts – global commodity prices were also rising – even if Subbarao had raised rates faster, it is not clear if the results would have been very different.
While the jury is out on whether Subbarao was an effective Governor for these reasons, if the government behaves as irresponsibly as it did during UPA-2, no matter how top-class the team at RBI, the faultlines will show up in either runaway inflation or in the exchange rate – that’s a big learning for the next Governor and that is also why he/she will have no option but to make public concerns over government policy. And if the government hopes a bureaucrat or a ‘pro-growth’ economist/banker is a better choice at RBI, Subbarao’s behavior shows how an individual changes with fuller autonomy and with a clear mandate like inflation control or keeping elections clean – the CAG and the Chief Election Commissioner are good examples in this context. Keep in mind that, as chief economic advisor, Rajan was in favour of using RBI equity to recapitalize banks – as RBI Governor he publicly ridiculed the same plan … where-you-sit-decides-where-you-stand is not true just of politicians.
