Chemistry between finance minister and RBI Governor crucial: Subbarao

By Meghna Mittal

New Delhi, July 26 (IANS) Considering the strained relationship between the government and the Reserve Bank of India chiefs, former RBI Governor D. Subbarao said there was no way out of it and a lot depends on the latter's chemistry with the finance minister.

“Both have the same objective of growth, but RBI looks at long term growth and government looks at short term growth that results in different priorities for both. There is no way out. It all depends on the chemistry between FM (finance minister) and RBI (Reserve Bank of India) Governor,” Subbarao told IANS.

Talking about the “chemistry” between him and then Finance Minister P. Chidambaram when he was the RBI Governor during the period 2008-13, Subbarao said they shared a good rapport initially.

“I did listen to the FM (Chidambaram). But at some point of time you realise that RBI needs to take its rightful stance,” he said.

“RBI is to maintain inflation. RBI Governor always has a free hand. However, RBI does come under pressure from the government for its policy stance,” Subbarao said.

To reduce this friction between the two institutions, he suggests formation of the Monetary Policy Committee (MPC) may prove helpful as the RBI Governor alone would not be held responsible for interest rates.

“I support formation of MPC though it will curtail the decision making power of the RBI Governor. The Governor will discuss and listen to all stakeholders in the committee, so he will not be solely responsible for the decision on interest rates,” he said.

The government has notified the rules for setting up RBI's MPC and is in the process of laying out its framework.

Under the current system, the RBI Governor has the veto over the existing advisory committee, composed of RBI members and outside appointees. The committee decides on policy rates. The governor consults a technical advisory committee, but does not necessarily go by the majority opinion while deciding on the monetary policy.

Subbarao emphasised that the RBI was “autonomous enough” in law and practice as the government cannot give any directive to it. But it will be good to have the Governor's say in the appointment of the deputy governors, he added.

“It's good to heed to the advice of the Governor to the extent possible unless there are very strong reasons. And if the government does find that the candidate suggested by him is unfit, they should spell out reasons to the Governor. And those reasons must be objective,” Subbarao said.

In his book 'Who Moved My Interest Rates' Subbarao had accused Chidambaram of not re-appointing Subir Gokarn as the deputy governor despite him suggesting Gokarn's name.

“They (government) cannot disregard the suggestion of the Governor just because they believe that the incumbent deputy governor's point of view does not accord with their own point of view or to disregard the recommendation of the Governor because you want to show your displeasure to the Governor for having taken an independent line. I think those are the issues on which I am taking issues,” Subbarao told IANS.

Subir Gokarn is said to be among the people being considered to succeed Raghuram Rajan, after the latter's term comes to an end on September 4.

“He (Gokarn) is an outstanding macroeconomist. He has an equanimous personality. His prior experience in RBI goes in his favour,” Subbarao said.

Talking about the rising bad loans of banks, the former Governor said that though the problem had originated in his time, nobody knew it will magnify to such proportions.

“It was not that we were unaware of the (NPA) problem, but not all of it developed during my time. Nobody realised that it will develop into such a humongous problem,” he added.

(Meghna Mittal can be reached at meghna.m@ians.in)