Who Moved My Interest Rate, asks Duvvuri Subba Rao of PC & Pranab

There were days when Union Finance Ministers were in the quicksands. But ever since the Finance Ministers got smarter and passed on the peril to the Reserve Bank of India governors. while the government and the Reserve Bank of India (RBI) agree to disagree on certain issues, it is the monetary policy that has the final seal of approval of both parties. Former RBI Governor Duvvuri Subbarao says the reality is quite different. Subbarao steered the Central bank at a difficult period between September 2008 and 2013. His frank book - `Who Moved My Interest Rate' – leading the RBI through Five Turbulent Years, is replete with stories of how finance ministers during the time he was in charge of the Central bank - P Chidambaram and Pranab Mukherjee - often made public their differences with the RBI on decisions on the interest rate. While the ministers wanted to see RBI lower rates, Subbarao maintained a hawkish stance to contain inflation. The resultant background clashes, which most notably spilled out in the public when Chidambaram threatened to “walk alone” to “face the challenge of growth” if the central bank did not cooperate, created its fair share of controversy. Referring to a column by Chidambaram in The Indian Express wherein he said the government and the RBI were on the same page in eight out of 10 monetary policy statements or actions, Subbarao says that may be the minister’s experience, but certainly not his. “I found that all through my tenure, the government was distinctly uncomfortable with the RBI raising interest rates and seemed convinced that monetary policy was choking growth”, he says. The lingering hurt has perhaps prompted the former governor to say that “the logic of why the Reserve Bank should compromise its judgement so as to become a cheerleader for the economy never appealed to me”. He recounts an incident when soon after a monetary policy statement in which he had “refused to fall in line,” Chidambaram arrived at a function in Mexico where both of them had gone for a G20 meeting, greeted everyone, but pointedly ignored him all through the evening, leaving him “with an uncomfortable feeling”. “I have been asked several times if there was pressure from the government on setting interest rates. There certainly was, although the precise psychological mechanics of pressure would vary depending on the context, setting and personalities,” Subbarao writes in his book. “Both Chidambaram and Pranab Mukherjee were piqued by the Reserve Bank’s tight interest rate policy on the ground that high interest rates were inhibiting investment and hurting growth.” The fight for autonomy of the central bank had its own steep cost. Subbarao says he saw two of his deputies leave RBI without getting an extension, despite being highly recommended by the governor himself, which according to custom and law, should have been accepted by the Finance Minister. Mukherjee, as finance minister, did not give a second term to Usha Thorat after October 2010 and in the case of Subir Gokarn, the selection list was reconstituted to bring him down from the number one choice to eventually let him go, as Chidambaram wanted to bring “fresh thinking” into the RBI. Subbarao has even hinted that his own reappointment in 2011 was not pursued eagerly by then Finance Minister Mukherjee, but he got it nevertheless because of the intervention of then Prime Minister Manmohan Singh.