Former RBI governor D. Subbarao , whose tell-all memoir ‘Who moved my interest rate?’ was recently released spoke to Manojit Saha.
What is your view on a committee, headed by the cabinet secretary, being set up for identifying the RBI Governor?
Certainly, it is good to have a committee process to identify and shortlist candidates for the position of the Governor.However, to treat the Governor simply as a regulator would be inappropriate because RBI is also the monetary authority. It is okay to appoint a search panel with eminent experts to shortlist candidates, for the finance minister and the prime minister to decide.
I don’t think it is advisable to bureaucratise the selection of the governor and treat him just like a regulator because the Governor is more than a regulator. We cannot leave it to the bureaucracy to identify candidates for the RBI Governor.
You wrote about the uneasy relationship with finance ministers in the book. Have you felt that the government was trying to undermine the autonomy of the RBI?
Yes, that was the feeling I had, especially, as I wrote in the book, the activities of the financial services department of the finance ministry, trespassing on regulatory turf, that was certainly undermining RBI.
To some extent that uneasy relationship between the government and the central bank is inherent in the growth – inflation dynamics; that the government always focusses on growth while the central bank always focusses on long-term price sustainability. What is important in our context is how the tensions are managed.
Should the current Governor Raghuram Rajan have been given a five-year term?
Certainly yes, he has done very well. He has enhanced the credibility of RBI.
Do you think the setting up of a Monetary Policy Committee can ease the tension?
It can go both ways. In some sense it can reduce the tension, because RBI can always push back against pressures saying we have to deliver on the target. Therefore, it gives some additional leeway for
RBI to ascertain its point of view.
On the other hand, RBI with a single-minded focus on delivering on inflation targets can hurt growth prospects. Therefore it needs a balanced and mature approach. I believe the monetary policy committee is a good institutional arrangement, that you shift the decision-making from the governor as an individual to the committee.
RBI has moved towards an inflation-targeting framework, about which you had had reservations as a governor…
Some of the facts that were behind my reservations have changed. For example, we now have single CPI index today for the country, which acts as an anchor for the monetary policy.
Administered interest-rate regime has now come down because interest rates on small savings are now anchored to the yields on government securities. The government is showing commitment to fiscal consolidation.
But I continue to believe that delivering on inflation targets will be a challenge for the RBI.
Will the new governor face pressure from the government, as you did, to cut interest rates?
Quite possible. The new governor should keep an open mind, should listen to all stakeholders, including the government and make a professional decision which he believes is in the larger public interest.
Why do you think autonomy for a central bank is important?
Central bank autonomy is important because the primary mandate of the central bank is price stability. Price stability is a necessary condition for long-term, sustainable growth.
But maintaining price stability requires sacrifice of growth for the short-term. Politicians in a democracy, driven by democratic compulsions, may not agree to sacrificing growth. So you need a central bank that is autonomous and free of political compulsions and to take a long-term view in order to achieve macroeconomic stability.