A RBI's Ex-Governor Speaks Out

Dr D Subbarao's book "Who Moved My Interest Rate-Leading the Reserve Bank of India Through Five Turbulent Years" received more media attention, perhaps, because Reserve Bank of India was already under limelight for right and wrong reasons. From September 2013, leadership provided by Governor Dr. Raghuram Rajan had increased the 'Brand Value' of India's central bank. Various circumstances including barbs by some unbridled economist-turned politician and an unhelpful North Block culminated in Dr. Rajan's announcement that he was looking forward to returning to academia once the present tenure was completed. RBI as an institution and its staff as a family, at least during the last two decades, have been paying a price for the stand-off between officials in the finance ministry and the finance minister on one side and the central bank on the other side on policy issues. Viewed in this context, the highlights from Dr Subbarao's book, quoted so far in the media, do not come as surprise revelations for RBI watchers. Still, Dr. Subbarao deserves a special thanks for putting together the thoughts of the well-wishers of India, in a manner that should pierce through the stubborn bureaucrats in the Finance Ministry and the 'seasoned' politicians who danced to their tunes during the period covered in the book.

The fig-leaf that tried to cover shame and give an impression to the outside world that the relationship between GOI and RBI is unlikely to break, come what may, has been removed. The highlights also explain why Dr Rajan is waiting for the end of the current term, to leave Mint Road.

The overt attempt to undermine RBI autonomy started with the appointment of the Financial Sector Legislative Reforms Commission(FSLRC) by GOI and getting a report from an obedient Commission on dotted lines. Instead of bothering much about reforms in financial sector, FSLRC concentrated on clipping RBI's wings. It even recommended stripping of Governor's designation. It has to be said to the credit of Dr Rajan and his predecessor who staked their own career to defend the causes dear to protect national interests by cogently arguing and getting some of the irrational recommendations of FSLRC dropped or modified in public interest.

The Reserve bank of India Act, 1934 was the result of a couple of decades' deliberations and the institution has stood the test of time for eight decades now. Unless a political decision converts RBI into a department of GOI, India's central bank has the resilience to rise to the occasion in trying times and if GOI is able to ensure the kind of leadership the institution was fortunate to get so far in coming years also, this institution will continue to play a prominent role in India's economic growth.

In an article written on Dr Raghuram Rajan in August 2013, when his appointment as 23rd Governor of RBI was announced, I had suggested Dr Rajan read History of RBI, Volume I. My present suggestion for the prospective 24th Governor is to own a copy of Dr Subbarao's present book and get back to it whenever the choice is between advice of conscience and the expectations of political leadership or 'veterans' in the finance ministry.

S S Tarapore used to write that RBI Governor and his deputies have constraints as their continuance is at the sweet will of GOI. The finance ministry interference does not stop with policy issues affecting economy, but percolate to minor HR-related wage and pension matters governed by independent statutes and regulations. If successive RBI Governors and their deputies are fighting for RBI autonomy and falling, time is opportune for a review of GOI stance on the issue, to restore the prestige of India's central bank in national interest.

GOI continued to tease RBI Governor and the central bank staff by asserting ownership rights after Dr Subbarao left Mint Road also. Dr Raghuram Rajan has succinctly elucidated the areas of friction between GOI and RBI in the chapter "Governor's Overview" of the RBI Annual Report 2014-15. For example:

Paragraph X.28, captioned "Superannuation Benefits" of the report, quoted hereunder, is a tell-tale narrative which prompted S S Tarapore to make the following observation in his column in this paper once:"Has one ever heard of a borrower wanting to determine the remuneration of the banker? Prime Minister Narendra Modi should break government's hegemony over the RBI."

"Superannuation benefits

In 2003, the Reserve Bank, with the approval of the Central Board, had made some improvements in the monthly pension paid to employees who retired prior to November 1, 1997. However, the government had observed that the improvements in the pension scheme could not be effected without suitably amending Regulation 2(2) of the RBI Pension Regulations, 1990 and requested the Reserve Bank for their withdrawal. In October 2008, these improvements in monthly pension were withdrawn by the Central Board. This was, however, challenged in the High Court of Judicature in Bombay, where the Hon'ble High Court set aside the Reserve Bank's circular regarding withdrawal of improvements. Since then, there has been persistent demand from all the pensioners/retirees for improvements in pensions. However, the matter remains unresolved till date, though the Reserve Bank and the Government are fully engaged with the issue."

The issue remains unresolved till date.

Dr Subbarao's book has revived the debate on central bank autonomy and in that context, the extent of acceptable tolerance level when it comes to interference by GOI in mandated policy territories of RBI. One argument articulated in an article by T T Ram Mohan (IIM, Ahmedabad) in his article "Limits of autonomy" (The Hindu, July 18, 2016) is that GOI is responsible to the people and outside bodies including Election Commission, RBI and judiciary cannot take a stance different from the political leadership in power. He even recalled the Election Commission's fate as a result of Seshan's recalcitrant positions. Ram Mohan attributed, rightly, the addition of two more members to the Election Commission to this. I differ with Ram Mohan when he brackets Dr Subbarao with T N Seshan and Vinod Rai who openly and mercilessly took on political leadership without caring about their own career. Here Subbarao stands out as one who 'sacrificed' others( Dr Subbarao attributes refusal of extension of tenure to two of his deputies-Usha Thorat and Subir Gokarn to policy stances taken by RBI during his period which were at variance with GOI expectations). Though now he reveals having fought RBI's case, perhaps he did not succeed in protecting RBI's interests, as he was never interested in risking his own self-interests. But that should not reduce the gravity of the relationship issues between RBI and GOI flagged in his book, which have by now almost reached a breaking point.

Even the worst critiques will concede that RBI has been within its mandate to expect some freedom in talking about Monetary Policy. Those having doubt are welcome to read the Preamble of RBI Act, 1934. Of course, nothing prevents the political leadership from amending the Preamble! On inflation, Dr Rajan has already started worrying about that monster bordering the GOI prescription of the upper limit of the band of four plus or minus two! That is proof enough to argue that GOI need to listen to saner advice from RBI before allowing its spokespersons to publicly express expectations of political leadership before every Monetary Policy review. Options are getting limited. Either retain the institution of RBI, or make the central bank another department of GOI. No, heavens are not going to fall, in either case.

As regards the criticism about the Ex-Governor's stance on RBI autonomy, the general perception is that RBI has been within its mandate to expect some freedom in talking about Monetary Policy. Those having doubt are welcome to read the Preamble of RBI Act, 1934. Of course, nothing prevents the political leadership from amending the Preamble! That Dr Rajan has already started worrying about the inflation monster bordering the GOI prescription of the upper limit of the band of four plus or minus two, is evidence enough to prove that RBI's perceptions on inflation has been conservative.

About the Author: (M G Warrier, Ex-General Manager, RBI is author of the 2014 book "Banking, reforms & Corruption: Development Issues in 21st Century India")

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