Will D. Subbarao get an extension after his three-year term as India’s chief money manager comes to an end on 5 September? Newspaper and television channels have started speculating on Subbarao’s likely successor as well as an extension as Reserve Bank of India (RBI) governor with right earnest. Each time an RBI governor’s tenure comes to an end, this has been a normal practice in Indian media.
This time around, three names have been doing the rounds—Raghuram Rajan, a University of Chicago professor, an economic advisor to the Prime Minister and former chief economist of the International Monetary Fund; Kaushik Basu, chief economic advisor in the finance ministry; and economic affairs secretary R. Gopalan. And many believe Subbarao will get an extension.
Also Read | Tamal Bandyopadhyay’s earlier columns
Before his predecessor Y.V. Reddy’s five-year came to an end in 2008, the media indulged in similar speculations. Reddy, one of the few RBI governors who were given a five-year term from the beginning, had made it clear that he would not like to continue after his term expires. Planning Commission deputy chairman Montek Singh Ahluwalia was a strong contender for the post. Adarsh Kishore, an executive director at the International Monetary Fund, and Rakesh Mohan, then a deputy governor at RBI, were also in the fray. Mohan, the first deputy governor born after independence, came to RBI in late 2002 but, before finishing his three-year term, moved to finance ministry as secretary of economic affairs, only to come back to the central bank after eight months. His familiarity with RBI and his reputation as an economist were the factors in his favour. He was even informally interviewed by then finance minister P. Chidambaram but ultimately finance secretary Subbarao was chosen for the post.
If indeed Subbarao gets an extension, it won’t be a first for a serving governor. In fact, Reddy’s predecessor Bimal Jalan, who served for six years, received an extension as did C. Rangarajan, who was governor before Jalan, for five years.
I am not aware whether the government has initiated any formal process to identify Subbarao’s successor. In fact, there is no formal process for such an appointment. There is no search committee to prepare a list of candidates. The Prime Minister’s Office (PMO) chooses the governor with inputs from the finance ministry and the outgoing governor. The politicians of the ruling party, and even regional parties, do play a role in the selection but the corporate houses that normally try to influence the appointment of chiefs of commercial banks don’t have a voice here. In its 76-year history, only once has a commercial banker been appointed governor—A. Ghosh—who held the post for three weeks in 1985. By tradition, bureaucrats and economists are considered for this post.
Ahluwalia was also the strongest contender for the governor’s post in 1997 when he was the finance secretary, but Jalan, then member secretary, Planning Commission, piped him to the post. Arjun Sengupta, also a member of the Planning Commission, was in the fray at that time.
When Jalan moved out of Mint Road in September 2003 before completing his extended term to become a Rajya Sabha member, two bureaucrats were keen to replace him but neither N.K. Singh, then a special secretary at the PMO, nor S. Narayan, then finance secretary, could make it. Reddy, who was a deputy to Jalan as well as his predecessor Rangarajan, came back to head RBI, cutting short his stint as India’s director on the executive board of the International Monetary Fund (IMF) in Washington.
Jalan, RBI insiders say, was in favour of Reddy over others as he was not fond of the idea of a finance secretary moving to the Indian central bank directly from North Block, the secretariat building on Raisina Hill that houses the finance ministry. Apparently, he thought this would encourage bureaucrats to consider the RBI governor’s post as an automatic career progression. Jalan himself was a finance secretary but there was long gap between his stint at North Block and RBI. Reddy, it seems, did not push his deputy Mohan for the top job and Subbarao came directly from North Block.
Bureaucrats in Delhi say Prime Minister is in favour of Rajan while the finance minister’s candidate is Basu. Meanwhile, newspaper reports suggest a couple of past RBI governors strongly feel that Subbarao should continue as he has been doing a fine job. There is no way I can confirm the veracity of such claims but there is no doubt that an early government announcement will help remove uncertainties that has gripped the financial sector.
With inflation continuing to rule very high and many believing that India’s policy rate is coming close to a peak, balancing price stability and growth will be a tough task for the central bank in coming months. Apart from taming inflation, RBI also needs to close a few projects such as private entities’ entry into banking, savings bank rate deregulation and larger play for foreign banks. There have been enough discussions on these but no closure in sight as yet.
One critical difference between Subbarao and his predecessors Jalan and Reddy is that the two past governors had competent deputies who could move to the corner room at the RBI headquarters in Mumbai but Subbarao’s deputies are relatively inexperienced for the top job at this point of time.
During his five-year tenure, Reddy only raised rates to contain an overheating economy. Subbarao brought down the policy rate from 9% to 3.25% to prop up a sagging economy, and later, with the rise in inflation, pushed the rate up to 7.5%. This will probably rise a little more till September. So, his rate actions will take a V shape. If indeed Subbarao gets an extension, his rate actions may look different—three-fourth of a W.
Tamal Bandyopadhyay keeps a close eye on all things banking from his perch as Mint’s deputy managing editor in Mumbai. Please email your comments to email@example.com