WHO MOVED MY INTEREST RATE?. ‘Is the RBI independent? I don’t have a binary answer’

It’s now official. What was always suspected and speculated upon — pressure on the Reserve Bank of India to suborn itself to the government’s wishes— has been confirmed by former Governor Duvvuri Subbarao in his tell-all book Who moved my interest rate? , which was released today.

Such pressure is not always subtle, sometimes it can be overt and there is a price to pay for standing your ground as Governor. That’s the takeaway from the numerous anecdotes given by Subbaro in his book.

Subbarao’s tenure coincided with the terms of two formidable gentlemen at the Finance Ministry’s helm — P. Chidambaram, who appointed him, and Pranab Mukherjee — consummate politicians with their ears to the ground. The run-ins were many between Subbarao and the two Finance Ministers he served but the underlying causes were always the same — tailoring monetary policy to suit government needs and chipping away on the perceived autonomy of the RBI.

First confrontation “Is the Reserve Bank independent? I don’t have a binary answer to this question,” says Subbarao. His first skirmish with North Block was within a month of his assuming office when he was in the midst of battling fires set off by the collapse of Lehman Brothers. Chidambaram suo motu set up a committee on liquidity management with Finance Secretary Arun Ramanathan as the chairman. The RBI was asked to nominate a representative on the committee.

“I was annoyed and upset by this decision. Chidambaram had clearly overstepped into RBI turf… I called up Chidambaram and let him know in unequivocal terms that his action was totally inappropriate, and requested firmly that he dissolve the committee,” says Subbarao. For good measure he told the Finance Minister that the RBI would not participate in the committee. This skirmish set the tone for an uneasy relationship between the two towards the later part of Subbarao’s term.

This irony in this run-in was that Chidambaram was the one who pushed Subbarao’s candidature with Prime Minister Manmohan Singh and Subbarao was seen as a government lackey sent to the RBI to do its bidding.

Differences on monetary policy Subbarao may well have been describing the present state of the relationship between the Raghuram Rajan-led RBI and the Modi government when he says, “There was constant and decidedly unhelpful friction between the ministry of finance, under both Pranab Mukherjee and later Chidambaram, and the Reserve Bank on what the government saw as the Reserve Bank’s unduly hawkish stance on interest rates, totally unmindful of growth concerns.”

He says that his attempts to argue with the government that the RBI was running a tight monetary policy only because it cared for growth cut no ice. “…the government remained unpersuaded or chose to be unpersuaded.”

It was not just policy rate that was the bone of contention, the growth estimate that the RBI would put out was a point of disagreement too. The government’s pet peeve was that the Reserve Bank was being too cynical in its forecasts. It wanted the central bank to share responsibility with the government for ‘shoring up sentiment’. “I used to take a consistent and firm position that the Reserve Bank cannot deviate from its best professional judgment just to doctor public sentiment,” says Subbarao.

He quotes former Finance Secretary Arvind Mayaram as saying that “whereas everywhere else in the world, governments and central banks are cooperating, here in India the Reserve Bank is being very recalcitrant’. The large fiscal deficit run by the government and the RBI’s view on it was also a constant source of friction. It as one of the prime drivers of inflation and undermined the RBI’s war on inflation. Interestingly, it was not just Pranab Mukherjee who was irritated with the RBI for this but also Manmohan Singh. “He understood the economic logic but always seemed uncomfortable with the Reserve Bank pointing to it…. In early 2012, he told Rangarajan, the chairman of his Economic Advisory Council to convey to me that he did not expect Subbarao, ‘who was finance secretary in the government and understood its political compulsions’ to take such a strident stand,” Subbarao writes.

Rupee crisis The former Governor has devoted an entire chapter to explain and defend his actions during the ‘taper tantrum’ run on the rupee, calling it his ‘toughest challenge’. Subbarao writes that he found it difficult to accept that the government was trying to paint the rupee problem as caused entirely by external factors when the root causes lay in the domestic economy. He says that he was concerned that failure to acknowledge this would lead to the wrong remedy. “I had several conversations with Chidambaram on this, but found him always dismissive of this view. He is too intelligent not to have seen the point…”

Subbarao also appears hurt by criticism that during this period, communication from him and the RBI lacked credibility and failed to bolster market confidence. “How indeed should the governor have spoken about the rupee? There were some suggestions that the Reserve Bank should have been much more assertive, more ‘alpha male’…. But what or who exactly is an alpha male?” he asks. In the same breath however, the former Governor concedes that he could have been more confident, consistent and tactful.

Subbarao is gracious to acknowledge the inputs he got from then governor-designate Raghuram Rajan in handling the rupee crisis. “… Raghu was on board all through the exchange rate turmoil and was more actively involved in all the decisions after he was named in early August as my successor.”

The decision to shore up reserves through rupee-dollar swaps with banks, for which Raghuram Rajan is now being criticised, was, it turns out, a joint decision between him and Subbarao. “Raghu was kind enough to offer that I announce these measures before signing off. But I thought that the measures would be more effective if he announced them as the incoming governor,” writes Subbarao.

RBI autonomy “I have been asked several times if there was pressure from the government on setting interest rates. There certainly was though the precise psychological mechanics would vary depending on the context, setting and the personalities,” discloses Subbarao. He takes on Chidambaram over a column written by the latter in August last year where he says that on 8 out of 10 occasions, the government and RBI have been on the same page. “The ballpark average he cites may be his experience, but it certainly does not accord with mine,” is Subbarao’s caustic response.

He says that the government would “routinely trot out” that a policy rate cut was necessary to buoy investor sentiment. “The logic of why the Reserve Bank should compromise its judgment so as to become a cheerleader for the economy never appealed to me.”

Price to pay Subbarao says that the price he paid for standing up to the government was that his recommendations in the reappointment of deputy governors were ignored. “A healthy convention should be to defer to the governor’s recommendation on the appointment of deputy governors. That privilege was denied to me.”

Thus, Usha Thorat was denied an extension of her term though she was eligible for reappointment as per the government’s own rules. Incidentally, there is a parallel to the present in this episode too. The government deviated from standard practice by constituting a selection committee to choose Thorat’s successor without informing the governor. Something similar played out recently when the present government did the same with Raghuram Rajan in the mater of filling a vacancy in the Deputy Governor’s post.

If Pranab Mukherjee was the main actor then, Chidambaram did an encore later in 2012 when he kept Subir Gokarn and Subbarao in suspense until the eleventh hour on December 31 when Gokarn’s term was ending, before conveying that he was not being reappointed. Subbarao sees these as slights to him for standing up to the government.

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