Who Moved My Interest Rate?

Title: Who Moved My Interest Rate? Leading the Reserve Bank of India through Five Turbulent Years

Author: Duvvuri Subbarao

Publisher: Viking Penguin, 2016 (First)

ISBN: 9780670088928

Pages: 323

Unusual it may seem, but the common man in India is very familiar with the Reserve Bank of India (RBI) as the bank which prints currency notes but in which you can’t open a savings account! True to the tradition and methodology of central banks worldwide, it indulges in a lot of activities designed to ensure the health of the country’s macro-economy. It is also the monetary authority of the country which keeps inflation under control while supporting growth, gatekeeper of the external sector, regulates and supervises banks, regulates payment and settlement systems and acts as the bank of banks as well as governments. Duvvuri Subbarao rose from the IAS cadre of Andhra Pradesh and climbed steadily up the ladder to become Finance Secretary to the nation. He was nominated as the Governor of RBI in 2008 by Prime Minister Manmohan Singh. This book covers the five years he was in office in which he had to tame the triple monsters such as the sub-prime crisis of 2008, European sovereign debt crisis of 2011 and the sudden fall of the rupee in 2013. Rao doesn’t distinguish between his private and official lives and he seems to have dedicated his entire time to satisfy the demands the country had placed on his shoulders. With about ten overseas conferences he had had to attend mandatorily in a year, there is practically no time left for anything. This book is not only about the challenges and dilemmas, but also an attempt to demystify the working of the Reserve Bank.

Even though the Governor of RBI is nominally independent of the controls of the government, he is bound by convention and precedent to bow to the government’s wishes, especially since the governorship is not enshrined in and protected by constitutional safeguards. The constant tussle between Rao and P. Chidambaram, the then Finance minister, is hinted at in the book. Chidambaram wanted to clip the wings of Rao, when he constituted a committee to manage liquidity concerns with the finance secretary as its chairman only a month after Rao’s assuming office. This was clear overstepping on the privileges of RBI and Rao vehemently opposed it. Besides, the government wanted a low interest rate regime in the lending sector to spur economic growth, but the bank had to intervene in the opposite direction to curb rampant inflation caused by the faulty fiscal policies of the government. Rao claims that he has set a record of 23 times in adjusting the interest rates – 13 times increasing and 10 times diminishing. The rate was reduced at first to bring into control the 2008 crisis seeping in from America and raised thereafter to tame inflation and shore up the rupee. Rao’s patient analysis of where the government had gone wrong is illuminating. He asserts that growth and inflation are not independent variables. If one is fixed, the other is automatically determined. It means that if the RBI is enjoined to deliver an inflation rate, the government will have to acquiesce in the growth rate that resulted. Governments often get confused on this idea. Chidambaram’s messy intervention in an attempt to force RBI policy is seen in another episode from October 2012. The finance minister wanted a rate cut, and so he convened a press conference on these lines just a day prior to RBI’s policy meeting. But, Rao was unrelenting and kept the rates unchanged. The minister extracted his revenge in the next G20 summit held in Mexico, where he totally ignored Rao in the dinner party hosted by the Indian ambassador. Moreover, Chidambaram refused to re-appoint two eligible deputy governors of the Reserve Bank whose terms were over but were supported by Subbarao for an extension.

The author had a baptism by fire immediately after assuming office as the governor on Sep 5, 2008. Just ten days later, the famed Lehmann Brothers went bust, setting in motion a cascade of events that embroiled the global financial sector in deep agony. Even in normal times, managing the tension between short-term payoffs and longer term consequence is a constant struggle. Rao admits that he wasn’t much familiar about the bank when he joined it, and so ushered in a program of dissemination of knowledge to the public. His rural outreach programs were the first of the kind in the country. This effort is claimed to be a part of demystifying the Reserve Bank in which the author contents himself with partial success. Data deficiency is lamented for the failure to link it to shape the economic policy. Data on employment, wages and industrial production do not inspire confidence. Data on services sector, which constitute 60 per cent of the GDP are scanty. The Modi government’s targeted implementation of GST might be a step in the right direction in doing away with the uncertainty of data.

What makes Subbarao stands out from the genre of such authors is his readiness to accept failure where it was warranted. He couldn’t stem the slide of the rupee in 2013 and was heavily criticized for that. This defeat came about through the hands off approach adopted by the bank. RBI was interested only in smoothing the transition to a stable exchange rate determined by market forces rather than trying to set the rate themselves. This means that if the market has decided to cut down the rupee by 40 per cent, the bank will only make the decline smooth to the new level rather than intervening to halt the slide at, say, 20 per cent. Rao also magnanimously attributes the restoration of confidence in Indian markets to the scheduled leadership change at RBI and the formidable reputation of his successor, RaghuramRajan. He shows no rancor to Rajan and remains on admirably friendly terms. The book demands greater autonomy for the bank which sets monetary policy. Regulating the policy might involve short-term pain which the government doesn’t like and paves the way for an intervention from Delhi.

I took up reading this book with some apprehensions because any volume on finance and economic policy is notoriously dry. But I must admit that I never felt like abandoning the book without completing it. Of course, the subject is still dry, but somehow, Subbarao makes it a little more palatable. This is in spite of his confession that he needs to improve on the communication front. He could’ve included some corridor antics and power play that invariably attends concentration of power in a few people. There was ample room for some backroom tactics, when the government was initially hesitant to extend Rao’s term after three years supposedly on Chidambaram’s opposition. The common man is always in the mind of the author but such complex verbiage like ‘hedging the forex exposures by corporates’ could’ve been simplified or explained. The book was published in early 2016 and we sincerely wish that he should’ve postponed it by one more year to include an informative discussion on demonetization announced in November 2016 when the high-denomination bank notes which comprised 84 per cent of the money in circulation were withdrawn overnight. This was such a direct assault on black money that it reverberated across all the corners of the nation, but seems to have produced mixed results. Readers would’ve enjoyed a detailed analysis of this drastic action from a former RBI governor. In the end, it can be safely said that the book studiously avoid controversy and sensational topics.

The book is highly recommended.

Rating: 3 Star