Subbarao, in his recently released book Who Moved My Interest Rate, wrote about the frictions between the government and the central bank over setting of interest rates and about the pressures he faced during his five-year tenure as the central bank chief. These pressures emerge from the inherent difference in priorities, with the government focusing on growth and the RBI on inflation control. Edited excerpts:
Why did you decide to write this book. Past RBI governors have written about the economy, sure, but no one has chosen to do a “tell-all" book. So why?
One reason is precisely that no one has written about their experience at the RBI, so I thought a book like this would add value to the public understanding of the Reserve Bank. Second, I was at the RBI through a crisis period. There was both commendation and criticism for what I did while at the helm but I thought I should communicate the challenges that a governor confronts. The book is not intended to defend my record or to establish my legacy or to reshape the narrative, but to give my perspective on the decisions I took.
I also want to demystify the Reserve Bank. So I thought making people understand what the RBI does and why it does what it does would enhance understanding of the central bank.
One theme that comes out through the book is the friction between the government and the RBI. Very early in the book you talk about this and say that it is “decidedly unhelpful". But you came from the government, so did it really surprise you?
To some extent, I expected it. I may have been a greenhorn governor but I was not a greenhorn to the system. So I was privy to the way the system works. But the precise form in which this pressure was exerted was unexpected and was a function of the circumstances in which we were operating.
You have written specifically about the pressure from both Pranab Mukherjee and P. Chidambaram. In Chidambaram’s case you recall the very public rebuke of the RBI when he said the government would “walk alone" to support growth after the RBI did not cut interest rates in 2012. What was the reaction from Chidambaram to your book?
He has been very generous and has endorsed my book. Of course he has his own point of view, but he said in an interview that he believes in freedom of speech. This is me telling my story.
You speak fondly of Manmohan Singh in the book. Were you not disappointed that a government led by him was not more sensitive to the RBI’s concerns?
It is difficult for me to make a judgement on that. But the prime minister perhaps has his own compulsions which I cannot presume to understand.
What drove you to stay the course despite all the pressure?
You go with your best professional judgment and what you believe is in the best interest of the country. As I say right at the end of the book, you have to perform your “dharma" as the governor of the Reserve Bank of India. Therefore you have to do what you think is correct even if different stakeholders like the government have a different point of view.
And that different point of view emerges from a difference in priorities?
Yes. I think some of these differences are inherent due to the growth-inflation tension. But that is the very rationale for giving the central bank autonomy. The point is that the central bank should take a long-term view distinct from a government which views issues over a shorter time frame due to democratic compulsions such as election cycles.
This is the case even though some elections have been won and lost on issues like onion prices. But, increasingly, we are seeing that growth is becoming the plank on which politicians are betting on partly because of the demographics. There are so many young people in the country and you have to try and fulfil their aspirations.
Your book gives the impression that autonomy for the RBI is not a given but almost a daily struggle. Is that the case?
It is not a daily struggle, but yes, certainly, autonomy is an issue. The RBI has to assert its autonomy because that is critical to the credibility of the Reserve Bank on monetary and regulatory policies. The RBI should not only assert its autonomy but should also be seen to be asserting its autonomy.
You write in your book that the friction between central banks and governments is not unique to India. In fact, you quote an example from the US and write: “In India, in particular, it is inconceivable that any politician would attack the RBI so sharply..." What did you then make of the attack on Raghuram Rajan by Subramanian Swamy?
I wrote that before the recent episode. If I was writing it today, I would not have written that. The entire episode dismayed me. The political establishment, not just this government, needs to make a statement through their actions that they respect the autonomy of democratic institutions and public policy institutions in the country.
Moving on to some of the other challenges you faced. One of them was the quality of economic data. How much tougher did that make it for you to decide on policy actions?
We had data but we were aware that the data was flawed. But you still have to work with what you have. What this meant was that in some instances, policy can end up being wrong-footed. For instance, in 2009-10, data was showing us that growth was still fragile and that is why we were raising rates in baby steps even though inflation had picked up. We now know that growth was almost a percentage point higher than what we thought and India was actually seeing a V-shaped recovery. If we had known that then, monetary policy would have been tighter. So data does wrong-foot the Reserve Bank and continues to do so.
Speaking of data, your book says that there was pressure on the RBI to project growth rates higher than what they were comfortable with...
Yes that did enter the discourse of conversation between the RBI and the government. That is counterproductive. You want a higher growth forecast but you want the RBI to maintain easy monetary policy, which is logically inconsistent.
Another challenge you faced was in managing the exchange rate. You acknowledge that there were errors made, particularly during the “taper tantrum". Was this one of the most challenging aspects of your tenure?
Most certainly. Managing the exchange rate towards the end of my tenure was certainly the most challenging episode of my tenure. It was the Reserve Bank’s decision to use monetary policy tools as an exchange rate defence. We had market intelligence that a lot of speculation was going on, including by big corporates in the country, on the exchange rate. This speculation was being facilitated by the amount of liquidity available. So tightening liquidity was important to arrest that speculation, which, in times of crisis, can be self-reinforcing.
Did it go wrong partly because of communication? You use an interesting analogy in the book where you say that the central bank is expected to be “alpha male" in its communication and that you may not have been strong enough?
I still agonize about why it went wrong. It was partly because of communication and also partly because the market was not expecting it. My thinking was that the market would see this as resolve on the part of the Reserve Bank of India to defend the currency. But because of the communication afterwards, they saw it as panic which added to the pressure.
Alpha male was not my phrase, but yes, some people believed that I should have been more confident both in my oral language and my body language.
But you also have to recognize that there was pressure on the rupee due to weakening domestic fundamentals. There was massive adjustment needed on the rupee and the taper tantrum just became the excuse for that correction. What was needed on the part of the RBI and the government was to manage the trajectory of that adjustment. Looking back on that, I think I could have done things differently.
You also highlight that the RBI’s stated policy on foreign exchange, where it says it intervenes only to manage volatility, needs to re-examined. Since reserve accumulation is not part of the stated goals, you did not absorb excess inflows in previous years, you wrote.
Yes, I believe that the stated policy needs to be adjusted. If reserve accumulation is part of the policy, you should say that.
I would certainly advise that the Reserve Bank policy be re-enunciated to build in the various objectives and also to be more specific. For instance, you should probably say that your exchange rate policy is not only to manage volatility but also to build self-insurance. Also, you should define volatility.
The argument by my staff was always that you should not tie yourself down, and in times of crisis, you will regret having done it. But I think you owe it to the market to be as specific as possible.
One issue that is not spoken of in your book is whether there was pressure on lending decisions of banks from the government.
I have no first-hand experience of that. I only read what is written and speculated in the press.
But given the surge in bad loans that we have seen, do you think these bad loans were being hidden under the carpet?
I don’t think anything was being hidden under the carpet. The Reserve Bank’s supervision is very strong. And we would constantly advise banks on what they should do based on the supervision reports
Should you have withdrawn regulatory forbearance for restructured assets sooner?
We did do that. The regulatory forbearance given was not consistent with international standards. We were aware that we have to roll back that forbearance. The beginning of that was made during my tenure and completed during Raghuram Rajan’s tenure.
Coming to some of the changes we are seeing now, you say that you are comfortable with the inflation-targeting framework..
Yes, but I also said that it has not been fully tested and I also said that it would be challenging for the Reserve Bank to deliver on the target all the time. But yes, that’s the way to go forward.
Will friction between the government and the RBI worsen in the current framework since fiscal policy will be key to meeting the target?
You could look at it either way. Having an inflation target could give the RBI more room in pushing for fiscal consolidation. But it could also, in some cases, become difficult to deliver on the inflation target if you have to be sensitive to growth or financial stability concerns.
Are you comfortable with the monetary policy committee (MPC) framework?
I am quite comfortable with that. MPC was actually one of the topics I was quizzed on when I was being considered for the governor’s post. However, I think that there should have been a transition period where the governor was given veto power. But if the government has decided, presumably after discussing with the RBI, that a transition period is not needed, then so be it.