DUVVURI SUBBARAO was Governor of the Reserve Bank of India (RBI) for five years, from September 2008 to September 2013, a period which he quite rightly describes as “turbulent years”. When he was just 11 days into his job, the financial world was shaken up by the crash of the giant Lehman Brothers, indicating that what had been watched from 2007 as a problem of the United States economy was a global financial crisis reminiscent of the Great Depression of the 1930s, though not that intense. It was followed by a disturbing inflation in India in 2010 and then by a sharp fall in the external value of the rupee.
Although Subbarao, who was Finance Secretary to the Government of India for one year before his appointment as RBI Governor and Secretary to the Prime Minister’s Economic Advisory Council before that, was familiar with some of these problems, as the RBI chief he had the responsibility of steering the Indian economy through these events. The book under review is a vivid account of how he dealt with them and much more.
For those who are not familiar with the functions and working of the RBI, Subbarao states: “It is the monetary authority of the country, which means that its main job is to keep inflation under control while also supporting growth. It is the gatekeeper of the external sector which entails monitoring and regulating capital inflows and outflows, and keeping the exchange rate steady. It regulates and supervises banks to ensure that the money that people save in banks is safe and is productively deployed towards generating economic activity; similarly, it regulates non-banking financial companies and segments of financial markets, again with the aim of channelling savings into productive investment.
“The Reserve Bank’s regulation extends also to the payment and settlement systems with the objective of making financial transactions safe, robust and efficient. The Reserve Bank is the central bank —that is, it is the bank of banks, and the bank for the Central government as well as State governments. On top of all this, and importantly, the Reserve Bank has a key role in the development of the country and drives an important social development agenda.”
Of course, as everybody knows, the RBI issues the currency of the country with the signature of the Governor seen on all currency notes. Thus, the RBI is an institution that impacts the daily lives of people and their efforts to improve their conditions so that the decisions taken by the Governor and his team are as important as those made by governments.
While governments, especially the Central government, and the RBI must work in tandem, their decisions can come into conflict with one another, especially when it comes to the determination of the rate of interest which, as the key variable in monetary policy, is primarily in the domain of the RBI. The interest rate has a significant bearing on investment decisions; the lower the rate, the more favourable it is for investments. Hence, investors and governments committed to “growth” are keen to have low interest rates. But when there are inflationary tendencies, the RBI exercises caution and tends to keep interest rates high. Consequently, the periodic revisions of the rate by the RBI (usually quarterly) are watched with great interest by all stakeholders and played up by the media as well.
Interest rate policy One of the issues discussed in the book, that of the differences between the RBI Governor and the Finance Ministers of the period, P. Chidambaram and Pranab Mukherjee, have received considerable media coverage after the publication of the book. The fact remains that during his tenure as Governor there were frequent revisions of rates, up and down, as was considered necessary during a very volatile period.
For instance, Subbarao’s predecessor, Y.V. Reddy raised the interest rate in July 2008, which the new Governor brought down significantly in October that year, just a month after he took over, signalling that in the new global context financial stability had overtaken inflation as the overriding concern. But soon inflation became the main concern of the RBI, leading to a tight money policy of high interest rate. Not that the RBI would take a decision on the interest rate without consultations with the Finance Minister.
Discussions are held between the Finance Minister and the Governor before interest rate revisions, but the view of the latter usually prevails because the priority of the central bank on this issue is widely recognised. Subbarao records that “for much of the time during my tenure, although not always, there were differences of view on the anti-inflation stance of the Reserve Bank. Both Chidambaram and Pranab Mukherjee were piqued by the Reserve Bank’s tight interest rate policy on the grounds that high interest rates were inhibiting investment and hurting growth.”
Subbarao is eager to point out that his position was different even when there were strong arguments from the government side to justify the “pro-growth” case. His overemphasis on this topic is understandable. As Finance Secretary he was on the side of the government; as Governor he had to be on the opposite side, especially if he was keen to establish that he was making independent decisions.
In all fairness to Subbarao, it must be pointed out that he has gone on record that in spite of the differences of perceptions and the heat of the arguments, his previous bosses were quite cordial towards him.
On the blurb of the book, Chidambaram states: “A learned, meticulous and honest account of Dr Subbarao’s five years at the helm of the RBI. His intellectual integrity shines on every page of the book.”
Another fact that Subbarao brings out is the manner in which the market (stock market, that is) watches every word of the Governor and even his facial expression to guess what the decision of the RBI would be on crucial issues. He draws attention to the information asymmetry that prevails in the market on the one hand and the “inside track” information that the RBI has access to, and the expertise and experience of its officials dealing with specific problems possess.
Working as a team with the Deputy Governors of the RBI and section heads is something that Subbarao had relied on.
One of Subbarao’s main achievements was developing a fairly stable frame for the monetary policy, especially interest rate policy.
Partly it evolved from practical experience: during his five-year tenure, the interest rate was changed 23 times, both up and down. Giving freedom to banks to decide on interest on savings accounts and deposits was one aspect of the new monetary framework. Not that the last word was said on the monetary policy, for the issue has continued to be discussed and debated. Another matter that he paid attention to was that of inflation-targeting on which there was global discussion.
Within the country there were two committee reports on the subject, one favouring an independent target by the Reserve Bank, the other pointing out that as the fiscal policy of the government was a major factor influencing inflation, it would be impossible for the RBI to set its own target. Subbarao favoured the latter view. The discussion on the subject would continue during his successor’s period as well.
There is much that one can learn from Subbarao’s account: monetary policy versus fiscal policy, growth with stability, the role of regulators in a predominantly market economy, factors that influence the external value of the rupee, and much more. But these may not be of much interest to the general reader. However, there is a great deal in the book that is non-technical and will be informative. Two of these deserve special attention.
The first is Chapter 14 that deals with Non-Banking Financial Companies (NBFCs) of which there are many in the country. They are usually not much in the news but play a significant role in the informal sector, by far the more predominant segment of our economy even now. A major difference between banks and NBFCs is that the former have access to the Reserve Bank’s repo window for overnight liquidity management, whereas NBFCs have to depend on other sources and therefore suffer from higher cost of funding.
Although the NBFCs concentrate on certain specific financial functions, they are under the RBI control to ensure the protection of those who have transactions with them. And yet there have been many instances of scams and failures. Registered chit funds, too, come under the purview of the Reserve Bank of India.
Microfinance is another segment that comes under the RBI supervision. Although started with a noble objective of helping those active in the informal sector of the economy, especially women, microfinance institutions (MFIs) have been facing problems, especially charges of usurious interest rates that call for greater RBI interventions. Subbarao had taken a special interest in the functioning of the MFIs, and readers of the book will get a much better understanding of the working of these agencies.
The larger issue, points out Subbarao, is that if the well-to-do sections in society require credit to move up the income and wealth ladders, those who are described as the weaker sections need credit for their very survival and to prevent them from becoming bonded to those who are ready to take advantage of their needs. Hence attention to non-bank financial arrangements is part of the larger objective of financial inclusion. “If there is to be inclusive growth, financial inclusion is the next big idea, as it will at once promote both growth and equity.”
Whether finance is the sure way to bring about equity must be critically examined, but the eagerness of an RBI Governor to be of help to the weaker sections is certainly commendable.
Subbarao deserves congratulations and thanks for opening up the RBI windows to the wider public to enable it to understand the working of a public institution that has so much impact on its daily lives.
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