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Who moved my interest rate?


In whose interest?
S SATHYA | Issue Dated: December 5, 2016, New Delhi
Tags : Duvvuri Subbarao | Manmohan Singh | P Chidambaram | KV Kamath |



Author: Duvvuri Subbarao

Penguin Random House India



Pages: 323

Price: Rs 699

The global financial crisis did not take a heavy toll on India. Yet, ordinary Indians had to combat high inflation and higher interest rates. India’s growth story suffered too.

That was but inevitable. When crisis hit the country in 2008, it was already integrated into the global economy through trade and finance. As such, how could India expect to remain an oasis of calm?

Yet, the country did manage well, at least on the monetary front. The credit for this must go to the governors of the Reserve Bank of India. They took sound economic decisions, independent of everyday pressure from the political class.

Finance Secretary Duvvuri Subbarao became RBI Governor in 2008. He headed the organisation for a full five-year term, till 2013, as India and the world continued to face economic turbulence. While announcement of monetary policy decisions – of raising and easing the interest rates– grab headlines, there is scant understanding of the inner dynamics behind the quarterly review of the monetary policy announced by the RBI.

Subbarao, currently a Distinguished Visiting Fellow at the National University of Singapore narrates the drama behind the dynamics of moving interest rates in his tell-all memoir: Who moved my interest rate?

No RBI governor faced as many crises as Subbarao. In 2008–09, he cut the interest rate, but raised it in the following two years to rein in inflation. He started cutting the rates again as inflation went below the target level in 2012. In his final year, he raised it yet again to defend the rupee.

It is important to understand that federal governments control fiscal policies, collecting and spending taxes, while the central banks control the supply of money, manage inflation and influence the currency. This is crucial for encouraging or curbing liquidity and maintaining overall economic stability.

Again, all over the globe, governments bat for growth while the central banks defend their turf. Such a confrontation rose between the UPA government and Subbarao.

Subbarao had worked closely with Prime Minister Manmohan Singh and Finance Minister P Chidambaram. He was Finance Secretary when he was appointed as the Governor. Amidst wild speculation in the media and analysts’ spin doctoring, Subbarao refused to toe the North Block line. This discomfited both Chidambaram and his successor, Pranab Mukherjee.

For instance, Subbarao points out in the book that when Chidambaram had, suo moto, constituted a liquidity management committee with the finance secretary Arun Ramanathan as its chairman, “I was annoyed and upset by this decision. Chidambaram had clearly overstepped into RBI turf". Similar instances are also recounted when Pranab Mukherjee became finance minister rafter Chidambaram was shifted to the Home Ministry, following the terror attack in Mumbai in 2008.

But there was a price to pay for holding the autonomy of the institution and for not falling in line. His proposal for reappointment of deputy governors Usha Thorat and Dr Subir Gokarn was dismissed. Instead, Chidambaram pointed out to Subbarao that all those who entered the RBI laterally had become hostage to the technocrats in the institution.

Subbaro cites other instances of friction between the RBI and the Central Government. But he was not walking alone. All the central bankers across the globe had strained relationships with their respective governments – Alan Greenspan, former chairman of the Federal Reserve differed strongly with President Bush.

Spread over 16 chapters, the 323-page book is an honest account of Subbarao’s five-year tenure at the helm of the Reserve Bank of India.

As a central bank governor, Subbarao was engaged in fighting inflation fuelled by UPA’s flagship scheme –the Mahatma Gandhi National Rural Employment Guarantee Scheme. Explaining the inflation situation to the prime minister, Subbarao writes: “As an economist, he understood my arguments, but as a politician he felt helpless.”

Yet, the RBI governor was unwilling to show any accommodation.

The book is not just about the constant friction he encountered with the government. It also delves deep into other significant issues, such as financial inclusion, financial literacy, subsidiarisation of foreign banks, microfinance and non-banking financial companies and the Sharada scam that hit millions across West Bengal.

Further, he gives an insider perspective of what goes on at the meetings of global financial institutions – the IMF, World Bank, Basel, G20, etc.

An easy book to  read, it is strongly recommended for economists, policymakers, students and anyone who wants to understand how central banks fight inflation, manage interest rates, and defend exchange rates, while combating divergent views. 

KV Kamath, former CEO of ICICI Bank and president of the New Development Bank, Shanghai, in his blurb for the book has effectively summarised the contents – “If this was a work of fiction, one would say unputdownable! Frank and candid, and with a sense of drama of a period in time we all remember...”

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Issue Dated: Feb 5, 2017