Riding the storm
Who moved my interest rate – Leading the Reserve Bank of India Through Five Turbulent Years
Author: Duvvuri Subbarao
Publisher: Penguin Random House
Pages: 321; Price: Rs 699
India has been tremendously lucky in the Governors that it has got to lead the Reserve Bank of India (RBI), the nation’s Central Bank. Their leadership, and their independence has stood the country and its economy in good stead during good and bad times.
Dr Duvvuri Subbarao is one such Governor who was at the helm of the RBI during the most stormy period in global finance in the last few decades – the financial crisis that hit economies around the world starting 2007-08, in the US, with the collapse of Lehmann Brothers, precipitated by the sub-prime lending mess.
While his predecessor YV Reddy can be credited for his role in averting a similar crisis in India, it was left to Dr Subbarao to steer the RBI when the situation was at its worst, first due to the US mess, and then the aftershocks and the uncertainty emanating out of the Eurozone.
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The book deals with this turbulent period in detail, and focuses on the actions that the RBI and the government took to mitigate its effects in India. The book also details the other issue that Subbarao faced as Governor – reining in inflation by raising interest rates.
As the current Governor, Raghuram Rajan, has also experienced, raising or cutting of interest rates is a touchy topic, and there is no unanimity on the issue. It is simply not possible for the Governor to keep everyone happy, as there are always people who believe that more could and should have been done in the matter. As he says in the book: “There was criticism of my monetary policy stance, ironically from opposite directions – by the hawks for being too dovish and by the doves for being too hawkish.”
Another issue that the current Governor might find all too familiar is the friction and tension between the RBI and the Central government. If recent events have led observers to believe that the friction between the current Governor and the Centre is because Rajan was appointed by Congress and there is now a BJP government ruling in Delhi, then Subbarao dispels the notion.
Subbarao was appointed by the Congress government, and was in fact the finance secretary before taking over as the RBI Governor, and had worked closely with PM Manmohan Singh and Finance Minister P Chidambaram. It still could not stop differences cropping up. The differences were largely because of the political compulsions faced by the government that forced them to try and counter the economic arguments. As Subbarao again says, about explaining the inflation a situation to the Prime Minister: “As an economist he understood my arguments, but as a politician he felt helpless.”
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In fact, these tensions are not just limited to India, but exist in countries such as the UK, Japan, and even the US. Former Federal Reserve Chairman Alan Greenspan too has written extensively about his strained relationship with President George Bush Senior in his book “The Age of Turbulence”. In a situation remarkably similar to what has recently transpired, Greenspan says that the Bush administration faulted the Fed’s tight monetary policy for all its economic troubles. Greenspan writes that President Bush publicly challenged the Fed’s hawkish stance by saying: “I do not want to see us move so strongly against inflation that we impede growth.” Treasury Secretary Nicholas Brady in the Bush administration reportedly resented Greenspan’s reluctance to support growth by slashing interest rates, and bluntly complained of lack of forceful leadership at the Fed.
Subbaro cites another oft-repeated criticism by many that high interest rate regimes curtail investments, and gives an instance where he actually asked corporate leaders, how many would make an investment commitment in the following month were he to cut interest rates, leading to a sheepish silence. As he says, while interest rate was an important variable there were many factors holding back investments, such as implementation bottlenecks and governance concerns.
While the review thus far may have given the impression that this is all that the book is about, it would not be entirely correct. The book also talks about Subbarao’s efforts to demystify the RBI, and his outreach programme to let the common person even in remote villages know about what the RBI does, and how it impacts their lives. He championed the twin causes of financial inclusion and financial literacy; both critical but immensely difficult as he realised. He also gives us an inside look at what happens at important meetings and conferences such as the IMF, World Bank, Basel, G20 etc.
Subbarao starts his book with a chapter titled “May you live in interesting times”, and as it comes out throughout the book, it was an interesting time indeed. Apart from the global financial crisis, he also faced a crisis with the rupee depreciating sharply towards the end of his term. Apart from these there was the microfinance issue in Andhra Pradesh and the Saradha Scam in West Bengal, both incidents had a far-reaching impact on millions of affected people, and led to significant changes in the way that NBFCs and MFIs were regulated. Subbarao, as Governor, also proposed the subsidiarisation of foreign banks in the country as is the practice in several key markets.
KV Kamath, former CEO of ICICI Bank and president of the New Development Bank, Shanghai, in his blurb for the book has effectively summarised the book – “If this was a work of fiction, one would say unputdownable! Frank and candid, and with a sense of drama of a period in time we all remember. This is a primer on how central banks fight inflation, manage interest rates, and defend exchange rates, while at the same time combating divergent views.”
It is an easy-to-read book that flows very nicely, and is a must-read for all bankers, and students of economics and banking. Indeed, it is an education for everyone – ranging from students to captains of industry. After all, as the Governor has stated again and again, the RBI and what it does, touches all of us.
