About 15 months after Duvvuri Subbarao took charge of the Reserve Bank of India (RBI), the government appears to be fully convinced of the obvious advantages of a central bank governor with prior experience of having worked in the finance ministry.
Subbarao was appointed the RBI governor on September 5, 2008. Within 10 days, Lehman Brothers collapsed and the global financial system faced its worst crisis since the Great Depression of the 1930s. The finance ministry was concerned over how it would face the challenge of co-ordinating with RBI the government’s strategy on tackling the economic downturn. Not surprisingly, therefore, it was relieved with a former finance secretary at the helm of the central bank at that time. There is no doubt that the ministry’s worries would have been greater if it had to deal with an RBI governor with the reputation of being fiercely independent and having an equally independent style of functioning.
This is not to suggest that Subbarao does not have an independent mind. The point to be noted is that his having worked in the ministry as the finance secretary, and that too with a finance minister who too was fiercely independent-minded, helped him understand the importance of co-ordination between the central bank and the finance ministry during those critical days for the Indian economy. Indeed, the noises Subbarao made during the early days of the crisis were carefully calibrated. Not for once did anyone have any doubt that he was speaking out of sync with the thinking in North Block, the headquarters of the finance ministry.
That, of course, helped. The country’s monetary authority and the finance ministry, which oversees the administration of the fiscal policy, cannot afford to speak in two voices especially during such crises. Subbarao’s advantage was that, unlike a few of his predecessors, he was at the helm of the finance ministry just prior to moving over to Mint Road, where the RBI headquarters are situated. That gave him an understanding of the issues from both the perspectives.
His immediate predecessor in RBI, Y Venugopal Reddy, was also in the finance ministry, but before heading the central bank, he had a six-year long stay in RBI as deputy governor. Even Bimal Jalan had a long gap between his last finance ministry job and the governorship of the central bank. In that sense, Subbarao could be compared with S Venkitaramanan or RN Malhotra, both of whom moved to RBI immediately after their jobs in the finance ministry. Old-timers recall that the ease with which Venkitaramanan and Malhotra functioned as the RBI governor was largely due to their immediate finance ministry experience.
It is the belief of senior officials in the finance ministry at present that Subbarao enjoys a similar advantage. This may raise uncomfortable questions about the true autonomy of the central bank particularly with regard to its relationship with the finance ministry. However, nobody in the government has yet complained about the advantages inherent in getting a finance ministry bureaucrat to head the central bank.
The terrorist attack in Mumbai on November 26, 2008 led to a change of the finance minister.
P Chidambaram was moved to the home ministry on November 30 and for almost about eight subsequent weeks, Prime Minister Manmohan Singh took additional charge of the finance ministry. For Subbarao, it could well have meant freedom from the close watch of the finance minister and his top civil servants. With Chidambaram out of the finance ministry, the replacement of V Leeladhar, one of the four deputy governors, was delayed. Leeladhar’s term ended in December. Six months later, Rakesh Mohan too left the central bank.
There was a brief period in June 2009 when Subbarao had to work with only two of his deputy governors, Shyamala Gopinath and Usha Thorat. This was when Mohan had left, and Leeladhar’s replacement was yet to join. By the middle of June 2009 though, KC Chakrabarty, a banker, joined him — an appointment that once again showed that the new finance minister, Pranab Mukherjee, was in control of the situation. It took another five months before Mohan’s replacement, Subir Gokarn, could join RBI. With this, Subbarao’s team of deputy governors is at full strength.
The new team at Mint Road has also made it obvious that it believes in a much more open communication policy. In the early period of his tenure, Subbarao was cautious in his response to financial sector developments. However, in the last few weeks, he has given enough indication that he will be a governor without the jargon usually associated with the head of a central bank. It seems his deputy governors also are following a similar path. Gopinath, Thorat and Gokarn are all talking without the customary maze of words around their comments on monetary policy imperatives. This may be yet another triumph of North Block over Mint Road.