Each Reserve Bank of India (RBI) governor in the post-reforms period has left his unique mark on monetary policy and the institution that manages it.

C. Rangarajan took charge in December 1992 when Manmohan Singh had already unleashed his first economic reforms as finance minister in the Narasimha Rao government. Rangarajan was one of the key people in the 1980s responsible for dragging Indian monetary policy into the modern age, when monetary targeting became the main instrument of the central bank, based on the assumption that the demand for money function is stable in India and the Indian economy was insulated from large financial sector shocks.

Rangarajan oversaw huge reforms in banking, currency and financial market regulations, complementing what the finance minister was doing in New Delhi. The Rangarajan years also saw RBI trying to influence interest rates indirectly through the money markets rather than directly through administrative fatwas. In other words, monetary transmission channels got greater attention.

Bimal Jalan adapted monetary policy to a new era on an open economy and growing financial sector innovation, when the demand for money became unstable. He replaced monetary targeting with the multi-indicator approach, in effect giving the central bank a more rounded and adaptive brief. RBI would since 1998 track not just growth in monetary aggregates, but a host of other indicators on currency, credit, capital flows, fiscal position, exchange rates, etc., were taken on board to design policy.

Y.V. Reddy was one of the intellectual architects of the multi-indicators approach. He continued with it during his tenure from 2003 to 2008. Reddy stuck to the path despite immense pressure to embrace the then popular fashion of inflation targeting, quick financial sector reforms and openness to pro-cyclical short-term capital inflows. That led to huge differences with the finance ministry and a bare-knuckled attack by habitual RBI baiters. In this, he was different from Rangarajan and Jalan, who overall had very good working relations with the finance ministry. The global financial meltdown has proved that Reddy was right and his detractors wrong.

D. Subbarao will complete a year as RBI governor in the first week of September. It is obviously too early to write about his legacy. His initial months were spent working with the finance ministry to protect the Indian economy from the worst effects of the global economic crisis, but recent statements do give us some clues about what he has been thinking.

1. In the JRD Tata Memorial lecture he gave on 31 July, he made it clear that “inflation targeting is neither desirable nor practical in India for a variety of reasons". By making this statement, he implicitly rejected the advice offered by two committees headed by Percy Mistry and Raghuram Rajan— the first appointed by the finance ministry and the second by the Planning Commission, rather than RBI—that had offered reasons why India needs a central bank committed to inflation targeting.

2. Subbarao brought the risk of higher inflation back into public debate in the course of his first quarter review of monetary policy, which he unveiled on 28 July. The unusually loose monetary policy that was put in place to keep the economy on track will have to be rolled back if inflation is to be kept in safe territory.

3. The Tata lecture had another significant statement: “… the sudden and rapid expansion of government borrowing programme has impeded monetary transmission." In effect, the rising fiscal deficit “has resulted in firming up of yields, notwithstanding, the substantial excess liquidity, militating against the low interest rate regime we want". He also made a clear case in his monetary policy statement on why the government needs to put out a credible—note that word—strategy to bring down its deficit.

4. Meanwhile, Subbarao tossed a few challenges to RBI as well. He wants staffers to realize that even governors do not know everything. “I want them to understand that they will serve me better by disagreeing with me and telling me what to do rather than trying to outguess me," said Subbarao, who wants to “demystify the office of the governor" in the next three years. Meanwhile, he also wants to improve communication “at both technical and non-technical levels".

Why are these statements significant? Subbarao took over at a time when relations between the finance ministry and the central bank were fraught with tension. He was seen by some as a finance ministry man who would toe the New Delhi line, a view that was very unfair to both Subbarao and RBI. His recent actions and words suggest that he is his own man.

Like Rangarajan, Jalan and Reddy, Subbarao is likely to be an independent-minded central banker and not anybody’s representative. And that’s very good news.

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