‘Price stability is at the heart of a central bank’s mandate’

Dr Duvvuri Subbarao’s Who Moved My Interest Rate has laid open the inner workings of the Reserve Bank and the much talked of tensions between the regulatory bank and the finance ministry. Dr Subbarao, who was the finance secretary before serving as RBI governor for five years from 2008 to 2013, has not shied away from touching on delicate relationships, undue pressures and continuing demands on the RBI to lower interest rates, something that was also in focus with the current incumbent, Dr Raghuram Rajan. In this exclusive interview with the editor of The Billion Press Jagdish Rattanani, Dr Subbarao discusses some of these issues..

You’ve thrown light on the backroom pressures on the RBI, particularly in the context of formulation of the monetary policy. What would you say to the new generation of managers and leaders on this, and how should they respond to these situations My general advice to the new generation of managers and leaders is this: “Listen to all stakeholders with respect. Listen to the government too with an open mind because the government is a big stakeholder in RBI policy. In public policy, issues are seldom black and white. You have to make a judgement call. Internalise all that you’ve heard from the stakeholders but make that final judgement call based on what you believe to be the larger public interest.

Would it be fair to say that the government will often if not always have the upper hand and the office of the governor will sooner rather than later succumb and fall in line or pay the price, as it were Differences between governments and central banks are inherent because of the differing policy horizons. At the heart of a central bank’s mandate is price stability. Pursuit of price stability might sometimes entail a sacrifice in growth. Such sacrifice, if any, is only in the short term; in the medium to long term, price stability is a necessary condition for sustainable growth.

But because of democratic compulsions and electoral cycles, governments have little tolerance for any sacrifice of growth which leads to policy tensions. These tensions are not new nor unique to India. My book talks about how these tensions frequently crop up in advanced economies and mature democracies. What is different in India is that we do not always handle these differences in a mature or agreeable manner Finance ministers and RBI governors should learn to respect each other, listen to each other’s point of view and if they disagree, agree to disagree amicably. This will depend on both the institutional protocols we set as well as the personalities of the two protagonists.

You’ve seen both sides of the equation — on the government side as finance secretary and then as RBI governor did you or did you not have occasion to push some messages from the government to the RBI I do admit to canvassing, as finance secretary, the government’s point of view with the Reserve Bank, for example in bargaining for higher dividend or in the management of the exchange rate. There were also instances when I indicated the government’s point of view on monetary policy. But in areas where the Reserve Bank ought to have autonomy, I went no further than arguing the government’s point of view.

Taking from your story in the book on the “splendid, sylvan” surroundings of the governor’s bungalow and the slums nearby. The RBI is run by professionals, but would you say the average RBI manager has enough of a feel of the ground for the ordinary citizen — be it on prices or on other pressures faced by the common man The professional competence of an average RBI manager to understand the ground situation is unquestionable. Their empathy, however, is both a matter of exposure and emotional quotient, reflective of our society at large. Nevertheless, the RBI will benefit immensely from “keeping its ear close to the ground”.

In your book, you’ve tried to demystify the functioning of the RBI and explain it to ordinary citizens traditionally, the RBI has never done enough to open up, explain and engage with citizens. Why do you think this is The way the Reserve Bank is structured, it tends to be an insular institution with depth in its policy domain but not enough breadth in areas beyond its domain. Demystifying the Reserve Bank was driven by twin objectives: First to understand the perspectives of the larger public so that they feed into the Reserve Bank’s policies and, second, to make the public understand what the Reserve Bank does and how that connects to their everyday lives. I believed this will enhance RBI’s accountability.

You’ve said the RBI, which “jealously” guards its autonomy, should also be accountable for results. We are now moving towards inflation targeting which is quantifiable and it is therefore possible to hold the RBI to account in that regard. But not all of RBI’s deliverables are quantifiable or reducible to objective metrics. Nevertheless, it will be good to institute a practice like in the US where the chairman of the Federal Reserve testifies before a Congressional committee on a regular basis. On similar lines, in India, the governor of the Reserve Bank should go before Parliament’s standing committee on finance twice a year to present a comprehensive report on the Bank’s policies and their outcomes. Besides establishing a formal and comprehensive structure of accountability by the Reserve Bank, a statutorily enshrined practice like this will also protect the Reserve Bank from potential assaults on its autonomy by the political executive.

How do you see the issue of ballooning NPAs and the rising concern on this count... Did you during your time or thereafter ever have concerns on this or worry that the problem with emerge with the ferocity it seems to have now The problem of NPAs originated during my time and we were certainly concerned about it One of the causes for the problem certainly was the loan restructuring allowed by the RBI as a crisis response measure when some insolvent, rather than just illiquid accounts, may have been restructured. But that was not the only cause nor the most important one. The problem grew in size because of lending to infrastructure which was uncharted water both for the corporate investors as well as for the banks and a host of implementation bottlenecks.

You were at the helm at a testing time (2008 economic crisis). You’ve called it “baptism by fire”. What lessons did you learn form that, in terms of India’s responsiveness to an evolving situation and how a well-heeled system can collapse — almost overnight As someone said, this crisis was too important to be wasted. There are many lessons for policy makers and central banks, and indeed for the financial sector and the large public We can never afford to let our guard down and we need to learn to make macroeconomic policies in a globalising world.

The Billion Press