Reserve Bank of India (RBI) Governor Duvvuri Subbarao has dubbed counter-cyclical stimulus policies a chakravyuh, easy to enter, tough to exit. Sticking to a Mahabharata metaphor, one could say Dr Subbarao has affirmed his dharma as a central banker, joining the battle against inflation with monetary policy ammunition, threatening to use the bramhastra of a rate hike if necessary.
Dr Subbarao has earned his spurs as a central banker dealing with a global crisis in his first year in office. His second year could well be consumed by inflation management at home.
If Prime Minister Manmohan Singh had to take a decision on RBI governorship a month after he actually did, in September 2008, he may well have opted for the comfort of continuity and the security of stability, and asked Dr Y Venugopal Reddy to continue for a year. Dr Subbarao took charge ten days before the Lehmann collapse. He had to hit the ground running.
In opting for Dr Subbarao, over the incumbent deputy governor Rakesh Mohan, the prime minister departed from the principle that former RBI governor Bimal Jalan had convincingly articulated to then Prime Minister Atal Behari Vajpayee, that a deputy governor succeed him. He recommended the name of his deputy, Venugopal Reddy, who was preferred to other contenders like NK Singh, Vijay Kelkar and S Narayan. Then Finance Minister Jaswant Singh went a step further and gave Dr Reddy a five-year tenure.
The precedent of an incumbent deputy governor becoming governor was, in fact, first set by Dr C Rangarajan’s appointment after S Venkitaramanan in 1992. Then Prime Minister PV Narasimha Rao accepted his Finance Minister Manmohan Singh’s recommendation and appointed Dr Rangarajan, selecting him over contenders like the late Gopi Arora, a former finance secretary and then executive director (ED) at the International Monetary Fund (IMF). Interestingly, Dr Jalan himself was an “outsider” in 1997 when he was appointed governor. He was India’s ED at the IMF. Then Prime Minister Deve Gowda chose him over contendors Arjun Sengupta and Montek Singh Ahluwalia.
In the monsoon months of 2008 when Prime Minister Singh was grappling with the issue of selecting a governor for RBI, the media was speculating that Mr Ahluwalia would be appointed, without realising that as deputy chairman of the Planning Commission, he had Cabinet rank. New Delhi is not yet ready to elevate the central bank governor to Cabinet rank! There were some who floated the name of the former chief economist of the IMF, Raghuram Rajan.
More From This Section
But the traditionalist view, conveyed by some to the PM, that the RBI governor should either be an incumbent deputy governor or the Union finance secretary, prevailed. The choice then boiled down to Dr Rakesh Mohan and Dr Subbarao and the prime minister chose the latter, with both former governor C Rangarajan and then finance minister P Chidambaram backing that decision.
Ten days after Dr Subbarao moved from Delhi’s North Block to Mumbai’s Mint Road, Lehman collapsed. For a year and a quarter after that, Dr Subbarao has had to steer RBI through very choppy global waters.
I recall Dr Jalan telling me a day before he handed over charge to Dr Reddy that he had been lucky as governor since the economy had not only survived the impact of the economic sanctions that followed the Pokhran-II nuclear tests, but that the country had finally been liberated from, what he called, the “external constraint on growth”. “I have had a relatively good six years”, he said, “I cannot imagine that Venu will be so lucky. Things cannot be comfortable forever!”
In the event, Dr Reddy had a relatively smooth ride with the economy, which grew at about 9.0 per cent through his tenure, even if he had to wage many policy battles at home! If he learnt the ropes as deputy governor managing the economics of scarcity on the foreign exchange front, as governor he was managing the economics of plenty. While he, and Dr Jalan, kept warning the government about worrying trends in global financial markets and banking institutions, few would have imagined that the leadership change at RBI would happen on the eve of a crisis.
Dr Subbarao, therefore, cut his teeth and had to earn his spurs handling the most difficult external economic situation since 1991. His leadership at the central bank through the difficult months of 2009 has, without doubt, been exemplary. As he led his four deputy governors into the RBI’s boardroom last Friday, he exuded the kind of confidence that only being in charge and in control gives.
Dr Subbarao’s management of monetary policy has been as sophisticated as his articulation of economic policy over the past 15 months. His speeches reveal a creative and alert mind, aware of what is happening around the world and at home. When he first arrived on Mint Road, many thought he would be a puppet in the hands of Delhi’s policy-makers. That he would lose his way steering the central bank through a global economic crisis, on the one hand, and an election year at home, on the other.
In the event, he has calmed the nerves of all the worriers. Last Friday’s monetary policy statement articulates the concerns of RBI very clearly, and sets out an agenda for action if inflationary expectations are not reined in. “With a stronger recovery in India, the risk of food price inflation causing generalised inflation cannot be ignored,” said RBI, and, without worrying about all the critics and the lobbyists who campaign against a rate hike, it has said it could bite that bullet too as and when necessary. Fighting inflation is RBI’s principal dharma. We are now assured the Governor has read his Mahabharata well and will uphold it.