DUVVURI SUBBARAO was Governor of the Reserve Bank of India from 2008-13, a period when the global financial crisis first hit financial markets and then the slowdown. Subbarao also had a testing time in his engagement with the finance ministry during this period — all of which he has now put down in a book ‘Who moved my interest rate?’. He spoke on a host of issues in an interview to SHAJI VIKRAMAN and GEORGE MATHEW. Excerpts:
Given the conflict between the RBI and the government on many issues, including during your tenure, how do you see it evolving ?
There are bound to be differences between the government and the RBI especially in a country like ours. So there should be understanding on both sides and they should express their opinion freely and frankly. As far as monetary policy is concerned, the Governor’s word must prevail. If the finance minister has a different view, he should try to persuade the Governor.
Do you think the proposed monetary policy committee (MPC) model with a casting vote for the Governor is the right way to go? You have been pitching for a veto for the Governor.
MPC is the right way to go forward. When I was writing the book, MPC was an issue that came up for discussion. In my very last speech at the Palkhivala Memorial lecture, I mentioned that MPC is the direction in which we must go. While I certainly believe that the decision by the committee is certainly better than the decision taken individually by the Governor- in the transition from decision making from the Governor to the MPC, we should have a transition time when the Governor will have the veto. The transition period can be five years till the mechanism of MPC gets established. We should have an MPC and the MPC decides (interest rates) but if the Governor is in disagreement with the decision of MPC, he should have a veto power for five years.
Should we get into all those binding agreements especially on inflation targeting? Where should the accountability of the central bank rest?
As far as inflation targeting is concerned, I think a binding agreement is necessary. The discipline of such a agreement is necessary for the market to predict that the RBI is committed in this regard … without binding the RBI to deliver the target, it won’t effective. On inflation targeting, there is debate over whether wholesale price inflation (WPI) or consumer inflation (CPI) should be the benchmark.
Many suggest core inflation should be the benchmark. Do you agree?
We needed to do it during my tenure as well. The reason we could not shift is that we did not have single CPI representative indicator in the country. By the time Dr Raghuram Rajan took over, we had a single CPI with some history. It could be used as a target. For the purpose of headline inflation targeting, we must target headline CPI inflation. The reason is that’s the inflation people are experiencing in the market. Targeting any other index would be misleading. Take core inflation. Core inflation knocks out more than 50 per cent of the basket. So an index that knocks out more than 50 per cent of the basket is not much of an indicator.
You mentioned your disagreements with the then finance minister (P Chidambaram) in your book. How was Prime Minister (Manmohan Singh) responding to your disagreements?
The Prime Minister never asked me (about it). He would ask … whether the finance minister was persuaded. I would say yes or no. He would leave it at that. He never pressed a point of view.
Does it mean he was supporting you indirectly?
You can say he was supporting me for he remained above this conflict between the finance ministry and the Governor.
Do you think you could have avoided those disagreements with the minister?
I tried and I am sure the finance minister tried, too, but there was a difference of view. They (finance ministry) did put pressure to calibrate the policy in a way different from the judgement of the RBI.
Given the experience of Rajan, what is your view on the issue of tenure of the Governor. Is his exit a setback in terms of attracting top-quality professionals for assignments like this ?
I would say asserting the autonomy of the RBI and what he’s doing in larger public interest is the matter of the personality of the Governor rather than the tenure. That I feel very strongly about. But beyond that it will be good to give the Governor a single non-renewable five-year term. Because then he can work over a five year horizon and has the time to evolve the agenda, implement it and tweak it if necessary and see the outcome. A five-year term is a reasonable time frame.
Do you think the autonomy and independence of the RBI is being compromised? One example is now a panel headed by Cabinet Secretary selects the Deputy Governor while earlier this panel was headed by the Governor.
I can’t comment on all that as I’m not privy to what happened. Yes, the Governor used to head the panel for selection.
How do you define the autonomy of the RBI? Where do you draw the boundaries?
In certain aspects, for example, the target for inflation is set by the government. But how that target is achieved should be left to the discretion of the central bank.
It can’t have whole independence but must have instrumental independence. In realm of regulation also, all regulators should be free… and by definition they should be autonomous. In a state-led management, it’s a shared responsibility of the government and RBI. The payments and systems are the RBI’s responsibility. In other developmental role that the RBI has, the question of autonomy doesn’t arise. You consult with the government. For example, on financial inclusion.
Looking back, do you think that the move towards predictability and not rocking the markets was the right one as you forgo the surprise element ?
I thought about it while I was on the job and after I left the job. Some people believe that you must be as transparent as possible. There are others who say you can’t be completely predictable. One thing is certainly true the more decrease in the freedom you will see the market less degrees of freedom you have that the central bank has. I would say that my own view or disposition is to be as predictable as possible but no more than necessary.
Should the RBI Governor restrict his comments to his domain or should be free to comment on issues beyond his remit- a criticism directed against Raghuram Rajan. Where should be the lines be drawn ?
I don’t think there can be strict code of conduct for this. The discretion about what issues that the Governor wants to address should be left to him. Evidently, it depends on the Governor’s personality, expertise, experience and background. You should leave it to the discretion of the Governor. It is also important for those who evaluate, or take a call that Governor should not have spoken… they should also be appreciative of the discretion and personality of the Governor… and intentions of the Governor.
There’s a perception that the RBI was slow in raising rates in 2011 when inflation was rising. Do you agree?
Yes, possible. I had earned the moniker of ‘baby steps’ Subbarao…. we had to take into account a number of considerations that the data we had… The data we had actually showed growth was slow than actually it turned out than it was. Then we saw the Euro zone crisis and a number countries which had moved around on the policy had to retrace their steps. Taking into account all these considerations, I believe that moving in ‘baby steps’ was the right way to go. But, subsequently data showed the recovery was much faster. Growth was higher… If we knew this at that time perhaps I would have taken ‘adult steps’. People who are talking about it now are talking with the benefit of hindsight.
Do you support the idea of super regulator?
Regulation can’t be done by a committee. It has to be done by an institution. The ‘super regulator’ idea is ill advised.