Subir Gokarn an outstanding macro economist, will make a good governor

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The Reserve Bank of India is quite autonomous in its functioning, says D Subbarao , Former RBI Governor, in an interview with ET Now about his new book. He also states how Subir Gokarn can be a suitable Governor for the central bank. Edited excerpts:

ET Now: I really want to touch on the topic of the book, it says “Who Moved My Interest Rates”, and that is indeed very interesting. Who indeed did?

D Subbarao: I hope the Reserve Bank. The Reserve Bank sets the short term overnight policy interest rate and thereby tries to influence the entire interest rate structure in the economy. So a lot of people might be wondering, ordinary people, that the interest on the deposit or on the savings account or the interest they pay on their housing mortgage changes and they must be wondering how come who moved this, and it is actually the Reserve Bank.

Therefore I thought this title appropriately captures the bread and butter business of the Reserve Bank.

ET Now: So the bread and butter business of the Reserve Bank decides my monthly EMIs and I think each one of us would be delighted to know what the Reserve Bank of India does. But I do want to talk to you first about some of the chapters that you have dedicated to autonomy of the central bank. How autonomous is the central bank in our scheme of things?

D Subbarao: Quite autonomous, I should say. Certainly much more autonomous than most people believe, especially most analysts and most educated Indians believe; it is certainly more autonomous than that. The governor almost does all the time does what he believes is in the larger public interest.

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ET Now: I do want to talk you about the differences that keep coming to light, not just in your terms and previous terms, in the present term and I think they always will, because the basic premise is that the mandate of the central bank is obviously very different from the mandate of the central government, which is inflation versus growth. Given that context, can there ever be harmony between the two entities? Can the governor and finance minister ever be the best of friends?

D Subbarao: Fist of all, let me say the saying that the mandate of the government and the mandate of the central bank are different, I think is somewhat of a misleading statement. Both of them are concerned about long term macroeconomic growth, stability, financial stability, price stability etc, but when in the course of business the mandate of the central bank is price stability, a low and steady inflation because that is a necessary condition for a long term growth, whereas the government, typically, especially governments in democracies, have a shorter horizon.

They have concern about growth in the very short term because their motivation is the electoral cycle, they also have concerns about democratic politics. So some tension between the government and the central bank in managing this growth inflation balance is inherent in the scheme of things. Such tensions exist in almost every country and almost all the time. They are not unique to India. They are not unique to our time.

ET Now: You have worked largely with two finance ministers Mr. Pranab Mukherjee and Mr P Chidambram. How different were the two gentlemen to work with, were they completely stark in contrast?

D Subbarao: That is a judgement you have to make but there was a lot of difference in the way the interactions between Mr Chidambram and the interactions with Mr Pranab Mukherjee. Mr Chidambram used to put across his arguments more firmly, more authoritatively and more substantively, whereas Mr Pranab Mukherjee or his team used to put across the arguments more subjectively.

Mr Chidambram believed that the Reserve Bank should be acting in acknowledgment of what he was doing towards fiscal consolidation whereas in Mr Pranab Mukherjee’s, time the view was that the Reserve Bank must be more sympathetic to the government’s point of view, because it should be more sympathetic to the concerns about growth.

ET Now: Were you then surprised when Mr Chidambram, after your decision to not budge on interest rates came out in the open and said that if the government has to walk alone, it will. Did it surprise you, did it upset you, did it take you by shock?

D Subbarao: Well, it did surprise me and it did upset me. Shock may be an extreme word. I was not shocked, but I certainly was upset and I certainly was surprised.

ET Now: Did it affect your relationship with him thereafter?

D Subbarao: No, I do not think so. In the very short term I write about some incident in Mexico, but it certainly did not impair our relationship. We did work professionally quite well for the rest of my tenure.

ET Now: And he is one of the people who has endorsed your books and actually he also conceded that he endorsed his books. So I think there is a lot to be said about policy making in public spaces?

D Subbarao: It is a lot to be said about the personality, I think. It has been very magnanimous on his part to have endorsed the book, and when I requested him for an endorsement, he agreed to give it even without asking to see the draft. So I thought he has been very generous.

ET Now: You have been a career bureaucrat and then, of course, you were the RBI governor for five years. Is it easy as a finance secretary to make that switch, or is it perhaps tougher, because you have been on the other side. You have argued a different case, you have been more on the North Block side than to be on Mint Street really?

D Subbarao: No, first of all I think it is wrong to stereotype that bureaucrats make better governor or worse governors than other people. It depends on the individual. There have been outstanding governors in the Reserve Bank drawn from various professions, economists, bankers, bureaucrats etc.

It depends on the individual. As far as the second question is concerned, yes it is an abrupt transition from being a finance secretary or bureaucrat part of a team to becoming the governor of the Reserve Bank because you are there all by yourself, you have to make the final call. So that transition is quite a challenge.

ET Now: Is it lonely there at the top of Mint Street on the 18th floor?

D Subbarao: It certainly is, because ultimately you have to make the final call. So it certainly is. You know, even if you take the Prime Minister, Prime Minister has the cabinet, he consults everybody, a lot of decisions are cabinet decisions.

ET Now: And it is never really a unilateral call that he takes.

D Subbarao: Yes.

ET Now: Your book talks a lot about being in the hot seat having said something that will move the markets and there is always this pressure. What you say will perhaps move markets, were there instances in your five years where you thought my god, why did I say what I did?

D Subbarao: Oh, certainly there were. I write about them in the book. For example, in mid July 2013 in the midst of taper tantrums we raised the policy rates, the MSF rate and repo rate in order to defend the exchange rate. That was a very unusual move because the Reserve Bank has not used monetary policy for exchange rate purposes, but we thought that doing that will communicate the resolve of the Reserve Bank to defend the exchange rate.

But the market reaction surprised us, because the rupee fell very swiftly and was quite brutal actually. Then there was a lot of concern about growth as well, because that was a time when we were concerned about growth rapidly decelerating. So the commentary was is the tightening of the policy by the Reserve Bank going to hurt growth.

Therefore, in my statement I said the Reserve Bank is sensitive to the concerns of growth but we had to this in order to defend the exchange rate, we will withdraw these measures as soon as the rupee stabilises and the market reaction to that was very adverse, because people interpreted that as the Reserve Bank, particularly the governor being hesitant. Particularly about defending the exchange rate.

The market believed that I should have shown undivided commitment to defending the exchange rate rather than worrying about growth at the same time.

ET Now: As the RBI governor is it perhaps tougher to explain your stance than to actually do that act?

D Subbarao: No, both are difficult. Often times, yes it is tougher to explain your act because you always do and put out a written statement, but then when you orally communicate, that is both an opportunity and a challenge. I would say, because it is an opportunity to elaborate on your policy stance, but it is also a challenge because you have got to make sure that you do not give any misleading signals.

ET Now: You did make a very strong case for Subir Gokarn to be reappointed deputy governor, his name is now doing the rounds for the top job at RBI, eventually of course it will be prime minister’s call but will be a good RBI governor, what works in his favour according to you?

D Subbarao: He certainly will be a good RBI governor, he has worked with me and he is an outstanding macro economist, he is a good manager, he is a very personable man, very equanimous personality. I think he will make a very good governor.