From managing crisis to managing the recovery, nothing sums up better Duvvuri Subbarao’s two-year tenure as Reserve Bank of India governor than the Roman expression, “make haste slowly”.
For Duvvuri Subbarao, who completes two years at the helm of India’s central bank on Sunday, life seems to have come full circle in a very short span of time.
In 2008, days before assuming charge at the Reserve Bank of India (RBI), Subbarao, who was then the government nominee on the central bank’s board, reversed an increase in pension for RBI retirees. The decision led to a furore among the staff because they saw it as finance ministry interference in an internal issue. It also led to the first staff strike at the apex bank in 16 years.
So, it’s somewhat ironic that the former World Bank economist now finds himself on the other side of the fence in what is seen as a conflict with the finance ministry on RBI’s autonomy, even on relatively mundane issues such as pay raises for RBI staff.
Among many other things, Subbarao got the RBI job as he was seen as better placed among other candidates to coordinate with the government. However, his initial efforts came under huge criticism from central bank watchers. While some dubbed RBI the finance ministry’s ‘department of monetary policy execution’, others feared RBI ran the risk of losing its clothes. But those were the early days, when the former IAS topper was still trying to come to terms with the nuances of monetary policy.
In July, Subbarao took the unprecedented step of publicly voicing his reservations about the government’s decision to bring in legislation to resolve regulatory disputes. He felt it would impinge on the central bank’s autonomy and its role as the final monetary policy authority. More recently, in its annual report released last week, the central bank once again voiced concern about its autonomy, which it said, “Should not be compromised either in fact or in perception.”
The central bank said the recent enactment of the Securities and Insurance Laws (Amendment & Validation) Bill — popularly known as the Ulip Bill — had raised concerns about RBI’s institutional independence and autonomy. The report said during the parliamentary debate on the Bill, the government had given an assurance that it scope would be restricted to jurisdictional disputes on regulation.
Subbarao had earlier followed up his public comments by writing a letter to the ministry to express concern that if the ordinance was converted into law, the government would in effect take away from RBI the role of financial stability. This, according to the governor, was the exclusive mandate of the central bank.
The era of tension (predecessor Y V Reddy had termed it “creative tension”) between the government and the central bank has indeed returned. The government, however, went ahead with the Bill, but made the RBI governor the vice-chairman of the committee, which was headed by the finance minister.
That the honeymoon between RBI and the ministry is over is also apparent from recent reports about Deputy Governor Usha Thorat not being reappointed when her term expires in November, despite Subbarao supporting her case. The ministry stuck to its guns to show who the real boss is and a search committee is scheduled to hold interviews for Thorat’s replacement next week.
But conflict with the ministry is just one chapter — albeit an important one — of Subbarao’s tenure at Mint Road. Equally important has been the leadership he has provided to the central bank during a period of unprecedented crisis, steering a policy stance from “managing crisis to managing recovery”.
The 60-year-old BSc from IIT Kharagpur and MSc from IIT Kanpur and IAS batch topper became governor in September 2008, days before Lehman Brothers collapsed. He spent his first few months slashing interest rates to keep the economy growing. Then, the crucial monsoons failed, which sent food prices skyrocketing. Having helped India avoid severe recession, Subbarao has since March raised rates 100-125 basis points. The consensus is he will continue with the calibrated increase, as inflation is still of great concern.
This is in tune with the governor’s belief that taking “several baby steps” would be appropriate on the path towards normalisation. The governor feels drastic rate hikes could jeopardise growth prospects.
It has also led to the criticism that RBI has been behind the curve in taking steps to strike a balance between growth and inflation. With inflation stubbornly high for about seven months now, a section of economists are now questioning the wisdom of being reactive rather than proactive, as monetary policy is generally viewed as most effective when it is forward-looking.
But the central bank’s stance was based on the reasoning that any drastic step could have hurt the economic recovery, and a sharp rise in policy rates would only have a limited impact, as the price rise was driven more by supply-side constraints. “All I can say is that our guidepost is festina lente, as the Romans used to say — make haste slowly,” Subbarao said recently in Bangalore, while stating that inflation showed signs of easing.
Observers say while predecessor Y V Reddy had a penchant for surprising the market, Subbarao wants to play it straight, as he believes too much uncertainty in difficult times could prove counter-productive. So, before beginning an exit from expansionary monetary policy, when reporters asked when the central bank is expected to start the process, a candid Subbarao confessed that even RBI did not have an answer.
One of his most enduring legacies could be his attempt to demystify the governor’s office. “What I mean by this is that I want our staff to understand that even governors do not know everything and they have to make judgement calls in a context of uncertainty, when the pros and cons of their actions are not completely clear. I want them to understand that they will serve me better by disagreeing with me and telling me what to do, rather than trying to outguess me,” Subbarao told CentralBanking.com, London, in July last year.
RBI watchers say Subbarao’s next battle is taming hot money that flows into countries like India, often fuelling bubbles and then exiting quickly. India “may well employ” capital controls to protect its financial system, Subbarao said in his policy speech in April. Under his leadership, the central bank also recently doubled the frequency of monetary policy reviews from quarterly to eight times a year in a move to decrease the need for off-cycle rate moves, of which there have been two this year.
Through all this, what Subbarao has always retained is his trademark sense of humour. Delivering a lecture earlier this month, the governor defined financial stability as “pornography. You can’t define it, but when you see, you know it.” A brilliant scholar — he is a physics graduate and has a doctorate in economics — Subbarao has the unique ability to laugh at himself.
In a recent public speech, the governor said, “Since so much of my talk has been shaped by comparing economics to physics, let me also conclude with a parallel between the two disciplines. Physics, an exact science, explores known unknowns. Economics, a social science, deals with unknown unknowns.”
He went on to elaborate: “We all know that all through his life, Einstein remained sceptical about quantum mechanics. In particular, he could not reconcile to the probabilistic nature of the physical world implied by quantum physics and famously said that ‘God does not play dice’. Less well known, perhaps, is the retort of Neils Bohr, who told Einstein, ‘Albert, stop telling God what he can or cannot do’. Economists have a much humbler remit. They cannot even tell man, let alone God, what he can or cannot do. They just have to take human behaviour as given and pursue their trade on that fundamental premise”.
A deep understanding of that “fundamental premise” is coming in handy for RBI’s 22nd governor.
