Duvvuri Subbarao was Governor of the RBI from 2008-2013. The excerpts from his book ‘Who Moved My Interest Rate?’, published in Viking by Penguin Books India, are reproduced here with permission from the publishers. (Through The Billion Press).
Under law, the Reserve Bank is not fully autonomous. The RBI Act lays down that: ‘The Central Government may give directions to the Reserve Bank where considered necessary in public interest to do so, but after consultation with the Governor.’ It is possibly this legal provision that is at least partly behind the perception that the Reserve Bank is not independent. But two points are to be noted here. First, the authority of the government to ‘direct’ the Reserve Bank is not absolute; it is circumscribed by the need to consult the governor beforehand, as well as the requirement that the direction be in the public interest. Second and more importantly, in the eighty years that the Reserve Bank has been in existence, the government has not invoked this provision even once. In some sense, this is a tribute to the sense of responsibility of both the government and the Reserve Bank.
But that is on the formal side. What about informal interference behind the scenes? Let me first talk about monetary policy. I have been asked several times if there was pressure from the government on setting interest rates. There certainly was, although the precise psychological mechanics of pressure would vary depending on the context, setting and the personalities. I have already written about how I would schedule a meeting with the finance minister before every policy review to apprise him of the macroeconomic situation and of my proposed policy decision. 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 ground that high interest rates were inhibiting investment and hurting growth.
As a columnist, after demitting office, Chidambaram wrote on 2 August 2015 (‘Across the Aisle — Monetary Policy Committee: Vote or Veto?’): ‘There is a view among commentators that finance ministers and central bank governors are always at loggerheads. That view may make interesting copy but it is far from the truth. On 8 out of 10 monetary policy statements or actions, the Government and the RBI will be, and in the past have been, on the same page.’ Chidambaram was finance minister for far longer than I was governor. The ballpark average that he cites — agreement eight out of ten times — may be his experience, but it certainly does not accord with mine. I found that all through my tenure, the government was distinctly uncomfortable with the Reserve Bank raising interest rates and seemed convinced that the monetary policy was choking growth. I invariably pushed back against the government’s suggestions for softer interest rates. My standard counterargument to the finance ministry used to be that it was not high interest rates that were standing in the way of investments. What matters in investment decisions is not the nominal interest rate but the real interest rate, which is the interest rate after knocking out the impact of inflation. Even though the Reserve Bank was raising the policy interest rate to control inflation, real interest rates remained lower than in the pre-crisis period when we clocked record investment levels and sizzling growth. If interest rates were the only constraint, there should have been a similar investment boom now. The fact that there wasn’t, shows that it was not interest rates but other policy and implementation bottlenecks that were inhibiting investment.
Obviously discomfited by the ball being thrown back into their court, the government would rebut—argued in different ways by different people — that investors are influenced not by real interest rates but by nominal interest rates, an argument that I always found unpersuasive. The other argument that the government would routinely trot out is that a policy rate cut was necessary to buoy investor sentiment. The logic of why the Reserve Bank should compromise its judgement so as to become a cheerleader for the economy never appealed to me.
A tacit agreement between the government and the Reserve Bank was that we should keep our differences behind closed doors. That did not, of course, stop the media from speculating about internal squabbles — stories that would gather a momentum of their own. Notwithstanding these so-called squabbles, it is standard practice for the finance minister to issue a statement endorsing the Reserve Bank’s monetary policy decision in the media shortly after it is announced.
There was a high-profile deviation from this standard practice in October 2012 when Chidambaram went public with his displeasure at the Reserve Bank’s decision not to cut interest rates. The events leading to this public rebuke of RBI started unfolding in the week before the policy. In the pre-policy meeting with him, I told Chidambaram of my decision to stay pat on the policy rate in view of the inflation situation and the continued concern about the fiscal situation which was undermining the fight against inflation. He was clearly unhappy with my proposed decision, was upfront with it and argued strongly for a rate cut. I did not believe I could yield.
Not one to give up so easily, Chidambaram took the battle forward by unveiling the government’s road map for fiscal adjustment in a hurriedly convened media conference just a day before the Reserve Bank policy meeting. The finance minister’s prerogative to release the government’s fiscal road map any time he chooses is unquestionable, but the timing of this particular unscheduled announcement, just a day before the policy, was clearly an unsubtle message to the Reserve Bank.
While releasing the statement, Chidambaram said: ‘Well, I am making the statement so that everybody in India acknowledges the steps we are taking and also acknowledges that the government is determined to bring about fiscal consolidation.’ When he was asked if the Reserve Bank would cut rates based on his announcement, he used the opportunity to send a loud message from Delhi to Mumbai via the media: ‘I sincerely hope everybody will read the statement and take note of that.’
I have high regard for Chidambaram’s competence; if there was one person who could deliver on the demanding fiscal deficit target in an admittedly complex and challenging political scenario, it was he. Even so, I was disinclined to change my decision based on his fiscal road map as it was a mere reaffirmation of the targets with no indication of the steps that would be taken to deliver on those targets.
