Art and science of central banking: RBI governors since 1991 reforms

The Reserve Bank of India has seen nine governors since the balance of payments crisis of 1991, which eventually led to the opening up of the Indian economy. While the liberalisation led to higher economic growth, it didn’t leave the subsequent governors without any challenges. From the Asian crisis to the global financial crisis to the once-in-a-century pandemic followed by geopolitical tensions, the challenges of the post-economic liberalisation era kept governors busy. They ensured that the impact of these external events had minimal impact on the Indian financial system while maintaining the independence and integrity of the central bank. There were domestic challenges too. Like high and stubborn inflation of the last decade, mounting bad loans of the banking sector, collapse of a large shadow bank, and the occasional bank failures. All of them ensured that the country’s financial sector remained strong and resilient while serving the needs of the world’s fastest-growing large economy. We offer a glimpse into their career and achievements  

 

S Venkitaramanan 

 

December 22, 1990, to December 21, 1992

 

S Venkitaramanan, the 18th governor of the Reserve Bank of India, helped steer the country through the balance of payments crisis of 1991 which was marked by rapidly declining foreign exchange reserves. He deployed innovative measures, including pledging gold reserves to raise foreign exchange to overcome the crisis. The RBI, under his guidance and in consultation with the government, devalued the Indian rupee twice in June 1991.

 

Before taking over as governor, he was finance secretary. And in 1989, he advised the Rajiv Gandhi-led government at the Centre to consider loans from multilateral agencies like the International Monetary Fund (IMF) to tide over the shaky economic situation. As a governor, he also initiated banking sector reforms.

 

C Rangarajan

 

December 22, 1992, to November 22, 1997

 

A macroeconomist by training, C Rangarajan wore many hats. Apart from being RBI governor, he was chairman of the Twelfth Finance Commission (2003-04), the chairman of the Prime Minister’s Economic Advisory Council from August 2009 to May 2014, a member of the Planning Commission, and also the governor of undivided Andhra Pradesh. He chaired a committee on balance of payments, and following the recommendations of the committee, the pegged rupee exchange rate was made partially floated in March 1992, and fully floated in March 1993 when he was the governor. 

 

This was a critical step towards developing a market-determined exchange rate and achieving current account convertibility. India became a member of the Bank for International Settlements during Rangarajan’s tenure as RBI governor.

 

Bimal Jalan

 

November 22, 1997, to September 6, 2003

 

Four months into the Asian crisis, Bimal Jalan took charge as RBI governor. His first priority was to address the exchange-rate volatility. He made it clear that the central bank would intervene in the foreign exchange market — mainly through public-sector banks but not exclusively — to do away with the ‘herd’ mentality in the market which was expecting continuous depreciation of the Indian rupee. 

 

He also hiked cash reserve ratio steeply to restrict the supply of liquidity and was instrumental in launching the famous Resurgent India Bonds by State Bank of India to raise funds from non-resident Indians, which was a runaway success. He was also a Member of Parliament from 2003 to 2009.

 

Jalan emphasised maintaining price stability which was instrumental in modernising India’s monetary policy framework. An alumnus of the prestigious Presidency College, Kolkata, Jalan’s focus on financial sector reforms strengthened the banking system, laying a solid foundation for future growth.

 

Y Venugopal Reddy

 

September 6, 2003, to September 5, 2008

 

Yaga Venugopal Reddy is widely credited with shielding the Indian financial sector from the contagion of the global financial crisis (GFC) of 2008, as he stuck to conservative, traditional policies. While the United States was impacted by the sub prime crisis, Reddy saw what was coming and increased risk weights on banks’ exposure to capital market banks as well as the real estate sector.

 

He received the country’s second-highest civilian award, Padma Vibhushan, in 2010 for exceptional and distinguished service in public affairs. Under Reddy, the central bank realised the importance of bringing the unbanked into formal financial services by asking banks to drive financial inclusion.

 

A 1964-batch IAS officer of the Andhra Pradesh cadre, Reddy served in the Union finance ministry and was also India’s representative to the International Monetary Fund (IMF).

 

Duvvuri Subbarao

 

September 5, 2008, to September 4, 2013

 

Within a fortnight of Subbarao taking charge at the Mint Road, Lehman Brothers went belly up. The bureaucrat-turned-central banker’s governorship from 2008 to 2013 was marked with the global financial crisis. In his autobiographical work, ‘Who Moved My Interest Rate?’, Subbarao described his journey at the RBI through these turbulent five years. His term at the RBI concluded with the country fighting a currency crisis due to what is famously known as ‘taper tantrum’. It was triggered by hints dropped by the then US Federal Reserve Chairman Ben Bernanke of cutting back the Fed’s asset-purchase programme — that made investors flee emerging markets. Subbarao, who studied at the IIT- Kanpur, the Ohio State University and at MIT, fiercely fought for the RBI’s independence. It was during his tenure that the RBI started the process of awarding new universal bank licences, culminating into two new banks being set up in the country — Bandhan Bank, and IDFC Bank.

 

Raghuram G Rajan

 

September 4, 2013, to September 4, 2016

 

Raghuram Rajan, widely credited with predicting the 2008 global financial crisis as the chief economist of the IMF, took charge at a time when the country was facing a currency crisis amid ‘taper tantrum’ triggered by the US Federal Reserve. India was labelled as one of the ‘fragile-five’ countries along with Turkey, Brazil, South Africa and Indonesia, due to a sharp depreciation of the domestic currency.

 

Rajan’s policies stabilised the rupee, shored up foreign exchange reserves. Next on his agenda was reigning in double-digit inflation. He appointed a committee, headed by the then RBI deputy governor Urjit Patel, to overhaul the monetary policy framework. The panel suggested having a flexible inflation-targeting framework which came into effect from October 2016, a month after Rajan’s term ended. Rajan forced banks to clean up their balance sheet by conducting asset-quality review, which resulted in the non-performing loan ratio ballooning to 11.8 per cent of total loans by March 2018, before declining steadily. He opened the door for differentiated bank licences by granting licences to entities to operate as small finance banks and payments banks. 

 

Urjit R Patel

 

September 4, 2016, to December 11, 2018

 

As 24th governor of the Reserve Bank of India, Urjit R Patel oversaw the demonetisation of ₹500 and ₹1,000 bank notes. Before his governorship, Patel was the deputy governor in charge of monetary policy. Patel was the first RBI governor to quit before the end of tenure, a first in 43 years. Though the reasons for his decision were not made public, reports suggested he was not on the same page with the government on many issues.

 

 Kenya-born Patel, whose grandparents were from Gujarat, has a PhD in economics from Yale University, an M Phil from University of Oxford and a BSc from the University of London. Patel has also served at the IMF. He was on deputation from the IMF to the Reserve Bank during 1996-1997, and in that capacity he provided advice on development of the debt market, banking sector reforms, pension fund reforms, and evolution of the foreign exchange market.

 

Shaktikanta Das

 

December 12, 2018, to December 10, 2024

 

A bureaucrat-turned-central-banker-turned-bureaucrat Shaktikanta Das assumed charge as the 25th governor of the RBI at a time when the relationship between Mint Road and North Block was at a low. From the beginning he emphasised a consultative approach for policy making. With the shadow of the IL&FS collapse still looming, the RBI, under Das, strengthened norms for shadow banks and introduced scale-based regulation. Das is known for deft handling of the financial sector during the Covid-19 pandemic — from cutting interest rates sharply to making liquidity available. He also announced a moratorium on loan repayment by borrowers, as incomes were hit due to the strict lockdown. He is also credited with handling a few bank failures each of which was resolved in a unique way. After the pandemic, Das’ biggest challenge emerged following the Russian invasion of Ukraine in 2022 along with interest rate hikes by the US Federal Reserve. Inflation in India stayed above the statutory upper tolerance band for three consecutive quarters. The RBI’s rate-setting panel hiked interest rates till February 2023 and did not cut till Das was in office, despite a clamour for rate cuts, including from New Delhi. Das is now principal secretary-2 to Prime Minister Narendra Modi.

 

Sanjay Malhotra

 

Since December 11, 2024

 

Sanjay Malhotra was the first governor after Subbarao to come to the RBI directly from the finance ministry. Malhotra, who graduated from IIT-Kanpur, just like Subbarao, was the revenue secretary before coming to the Mint Road.

 

In his tenure of a little over six-months so far, Malhotra has shown that he is not a prisoner of the past. The monetary policy committee, which Malhotra chairs as the RBI governor, has cut interest rates sharply — by 100 bps between February and June — and announced that banks’ cash reserve ratio requirement will be cut by 100 bps in phases from September, forcing banks to take a cue to pass on the rate-reduction benefit to customers. RBI has said the priority now is growth over inflation, and aspires for a GDP growth rate of 7-8 per cent.

 

RBI, under Malhotra, took a fresh look at regulation with the objective of lowering cost of regulated entities with the aim that the end customer should benefit. In May, the RBI laid down a framework of board principles for formulation of any new regulation which suggested extensive stakeholders’ consultation and conducting an impact analysis of a proposed regulation before finalising it.