A short history of RBI's turbulent relationship with the government

The story of the sacking of first RBI governor, Sir Osborne Smith, because of differences with the government, has been often told.

But who was his successor? His name was James Taylor, an additional secretary in the finance department in Delhi.

Unlike his boss in Delhi, Sir John Grigg, the finance member of the viceroy’s council, he didn’t think India was there only to be plundered.

He was only 46 when he was made governor on the unanimous recommendation of the Board. Manmohan Singh, who everyone thinks was the youngest man to be appointed Governor, was 48 years old.

Taylor had been intimately involved with the drafting and piloting of the RBI bill. His first task, made clear to him by Grigg, was to bring the RBI Board to heel.

It had a lot of Indian businessmen on it and they often took positions that were a variance with what John Grigg summed up the situation accurately in his autobiography. He wrote that the Board was dominated by ‘Hindu’ businessmen owing allegiance to the Congress. “This might have had serious consequences. That it did not was due largely to the skill and tact of Sir James Taylor... he showed utmost loyalty to me...”  

Taylor was expected to keep things on an even keel, giving the impression of being independent while doing what the government wanted, a tradition that has lasted to date. The first volume of the RBI’s official history has been very charitable to Taylor saying he harmonised the interests of the government and the Indians. That is simply not true.

It was an unequal relationship in which the government gave way on small things while holding firm on the large issues that directly affected British interests, such as financing and supplying its defence forces. Indian businessmen were unlikely to oppose British policies very much because the Second World War resulted in a huge increase in orders placed by the government.

That, in essence, was the unstated deal that Taylor managed to make with the Board, which till then had been quite uppity. Its non-business members were an earnest lot who genuinely believed that the government was open to persuasion on the matter of RBI’s independence and the role that the Board would play.

But money changes everything and when, in 1942, the time came to renew Taylor’s tenure for another five years, the Board approved it unanimously without much fuss. As happens in such cases, Grigg had to manoeuvre a bit to get some of the tougher nuts like Sir Purushottamdas Thakurdas to agree but he managed it.

When Taylor died so suddenly of a heart attack in 1943, it decided to hand the job over to an Indian, an ICS officer called C D Deshmukh who, incidentally, occupied 1, Safdarjung Road for a while in 1950. That house was allotted to Indira Gandhi in 1964. Deshmukh had been appointed to the RBI in 1938 to liaise with the government. He was then made deputy Governor in 1940

Deshmukh went on to become India’s finance minister in 1950, a post which he had declined in 1946 in the Interim Government, thus allowing Liaquat Ali Khan of the Muslim League to become finance minister. It was a decision everyone soon regretted.

Deshmukh may not have become governor if he had not received support from an entirely unexpected source, the Secretary of State of India, Leo Amery. The government in Delhi certainly tried hard to prevent his appointment.

When the Board met in April, there was a suggestion that an Englishman, Sir William Lamond, managing director of the Imperial Bank, be appointed for three years, after which Deshmukh could be made governor. But the majority of the Board stood firm and approved the appointment of Deshmukh.

It might be worth noting here that the suggestion to make Lamond the governor was moved by a Parsi and seconded by a Muslim and an Englishman. But the Hindus won the day by 7:3.

In the end, the government proposed a face-saver: the Board would have to accept a Muslim and a European as deputy Governors. The Board decided to agree to this condition – it had no choice really because the government had the veto – but one of its more vocal members, C R Srinivasan, made it clear that “...the powers of the governor are not sought to be short-circuited by the appointment of a deputy governor who possesses more contact and perhaps more confidence of the Government of India.”

For a while, Deshmukh was ‘advised’ by the finance department to consult the managing director of the Imperial Bank, Lamond. Deshmukh complied for a while and then stopped saying since there was never any disagreement, there was no need to consult.

Deshmukh played fair and tried his best to balance Indian and British interests but sometimes he lost patience, as when in 1945 he was asked to consult Delhi on some matter before deciding.

He told the finance department not to interfere. His letter is sharp: “... I cannot engage to do in subservience to what amounts to a claim to be consulted... I regard it as important... that the independence of the Reserve Bank be preserved ... and I feel constrained to enter a caveat against any semblance of an encroachment on its discretion.”

There were a couple of other occasions when Deshmukh had to tell the finance department to behave itself. It should be noted here that 34 years later, in 1979, a Special Secretary in the finance ministry called Manmohan Singh would give a sharp rap on the RBI’s knuckles for not consulting the government over some issue. Then again, in 1985, a young and brash chief economic advisor called Bimal Jalan would take strong exception to something the RBI did without consulting him.