An ex-RBI governor explains why financial instability is like porn (and has advice on lunch orders)

In 2009, former Reserve Bank of India Governor D Subbarao landed himself in a soup because of his penchant for humour. The global economy was in a turmoil and, at one panel discussion, someone asked what the term "financial stability" actually meant.

The governor had a ready reply. “Financial instability is like pornography, you can’t define it but you know it when you see it,” he said to applause and laughter.

While some found these comments rather unbecoming of a central bank governor, the answer sums up how Subbarao spends more time inside his head than outside it. Who Moved My Interest Rate is a tell-all autobiographical account of the turbulent years during his stint at the RBI and how he learned to walk the talk through “baby steps”.

Subbarao’s book is as honest and meticulous as it gets but by no means a drag – much like his stewardship of the RBI.

Subbarao, who was appointed head of the central bank in 2008, inherited an economy in turmoil due to the global financial crisis, which started with subprime mortgage lending in the US and spread through the world like wildfire . By the time he left the bank – five years later, with an extension of two years – the rupee was still dwindling and Indian economy was struggling to limp its way back.

"May you live in interesting times" is the Chinese saying that Subbarao claims defined his career at the Reserve Bank. When confronted with accusations from a section of the media that the financial crisis was inflicted by the new RBI governor, he would respond that it was logical that it would end only when his tenure ended. Something that actually came true as the rupee stabilised a week after he left the bank.

Governor vs government

While Subbarao has used the opportunity and leisure of the book to go over every major decision he took (and did not) during his tenure and weigh these in hindsight, the book throws new light on how the Reserve Bank actually functions in the midst of a political-business complex where monetary policy – specifically cutting rates – is expected to be the cure for all ills.

Subbarao would joke about this too by telling his media interlocutors that he was surprised that contrary to his fears, the governor’s job was, in fact, quite easy since one had to just cut interest rates. “And what’s more, the whole country cheered you as you went about the job with abandon!” he wrote.

This is somewhat a distillation of the conflict that Subbarao constantly faced with the government. In some instances, the government even pushed RBI to help drum up the sentiment by projecting a rosier picture of the economy than what was true – something that Subbarao claims to have vehemently opposed.

But, his pre-policy meetings with the finance ministry officials were always as tumultuous as one would expect. The government would favour lowering interest rates while Subbarao would want to hold back or even raise them. Largely, it was the RBI that prevailed but as Subbarao recounted, the government knew when and how to pull the strings.

Of course, those who don’t toe the line have to pay the price. One of these instances was when Deputy Governor Usha Thorat’s term was expiring in 2010 and Subbarao pushed for her reappointment until the very last minute, but the government did not yield.

“He [Pranab Mukherjee] didn’t budge and Usha became a part of the price we had to pay for asserting the autonomy of the Reserve Bank,” he writes. A similar tale unfolded two years later with another Deputy Governor Subir Gokarn, whose appointment was not renewed even after Subbarao’s repeated attempts to get him a second term.

Free within limits

Subbarao recognises the truth of the statement his predecessor YV Reddy one made: "The Reserve Bank of India is totally free within the limits set by the government."

He admits to having faced pressure from the government on setting interest rates but adds that the pressure was eased or exerted depending on context, setting and the personalities involved.

“The logic of why the RBI should compromise its judgement so as to become a cheerleader for the economy never appealed to me,” Subbarao writes.

An instance he recounts of a summit in Mexico where he went with P Chidambaram, when he was finance minister, is revealing. While Chidambaram greeted everyone, he apparently ignored Subbarao “all through the evening” in a public show of disagreement over the RBI's monetary policy stance.

It’s pretty much the same debate that has been playing out over the last year through Raghuram Rajan’s tenure as calls for his departure were made on the back of the argument that holding interest rates “wrecked the economy” as it stifled growth.

Subbarao, on the other hand, faced much stiffer opposition as he recounts that most of his policy meetings were turbulent as both P Chidambaram and Pranab Mukherjee were convinced that a tight-interest-rate policy was hurting both growth and investment.

Even for this, he once did a practical experiment by asking a bunch of top industrialists during a pre-policy consultation if any of them would invest if he cut the rate the next day. Even though all the industry representatives were calling for easier rates, Subbarao recounts that not one raised their hand – something that firmed up his belief that the problem of investment lay beyond just the nominal interest rate.

Dosa with Rajan

Subbarao faced a stormy tenure and his successor Raghuram Rajan hasn’t had it any easier. Rajan also faced opposition for his hawkish monetary policy stance and also faced trouble from the government for some of his off-economy comments. In addition, he did not get a second term – or an extension, unlike Subbarao.

While Rajan came up with the idea of Dosa Economics to explain how "a fall in interest rates actually ends in higher real returns and thereby increases the purchasing power of investors or pensioners", Subbarao describes how his first meeting with his successor was held over idli and dosa from Saravana Bhavan. Rajan and Subbarao kept in touch over the years. When Subbarao's term was ending, Rajan asked if he would seek an extension. Subbarao characteristically was frank and told him he wouldn't – and to move forward with his own application.

When Rajan finally took over, Subbarao couldn't help himself from indulging in some flippancy. Rajan could delegate decisions such as interest-rate changes to his senior staff comfortably, Subbarao told him – but important decisions should always be micro-managed by the governor, he advised.

What were those? Menu for lunches to be hosted by the governor, gifts to be given to guests and seating arrangements.