The New RBI Governor

After lots of speculation, the new governor of the Reserve Bank of India has been announced. It is D. Subbarao, currently the Finance Secretary, or one of the most senior civil servants in India. Like outgoing governor Y.V. Reddy, Subbarao is a member of the elite Indian Administrative Service. The other two top contenders were Montek Singh Ahluwalia, who will no doubt stay as Deputy Chairman of the Planning Commission, which give him a higher rank than the RBI governor (cabinet minister rather than one notch below). Rakesh Mohan, currently a deputy governor, will, according to predictions, move to the IMF or World Bank. Likely replacements for Mohan as deputy governor are chief economic advisor Arvind Virmani or former senior RBI official Narendra Jadhav, currently vice-chancellor of Pune University.

Subbarao also currently simultaneously holds the position of secretary, Department of Economic Affairs. According to the Business Standard, “Ashok Chawla, currently civil aviation secretary, may be appointed secretary, economic affairs. Chawla was additional secretary, economic affairs from April 2005 to January 2007.” The newspaper also reports that “Sindhushree Khullar, currently additional secretary in the department of economic affairs, has been empanelled to pick up the secretary rank.” Presumably that means she will shift to another charge, away from Economic Affairs.

What will all this mean? This game of musical chairs does not have a diminishing number of seats, so there is always the possibility that new blood and new ideas enter the policymaking arena as a result of Governor Reddy’s retirement. The Wall Street Journal earlier quoted Percy Mistry, head of an important committee that reported on making Mumbai an international financial center: “Percy Mistry, chairman of Oxford International Group, a financial-services firm with offices in the U.K. and Mumbai, said the central bank takes a conservative approach to many of its duties, and as a result it constrains competition and innovation in the financial system. It has been reluctant to allow sophisticated financial instruments and markets to develop, and it hasn’t pushed for the privatization of state-owned banks, insurance companies and pension funds, he said.”

Maybe Subbarao will fit the bill. According to the Business Standard, “Widely seen as a reformer, he [Subbarao] is credited with having authored a turnaround of Andhra Pradesh’s finances in the late nineties when the state slipped into an unprecedented fiscal crisis.” The Economic Times has a similar view: “Mr Subbarao, in contrast [to Dr. Reddy], is reckoned to be less hesitant on some key structural changes proposed for the central bank, making monetary policy its sole focus, divesting other functions such as public debt management and supervision of the banking system.” Presumably, Subbarao will also work closely with the Finance Ministry in his new job. That might be at odds with recommendations for greater central bank independence.

One Response to "The New RBI Governor"

  1. K. Subramanian   September 4, 2008 at 1:53 am

    The notion of heroes reshaping economic policies was never true except in the imagination of some writers. It is more difficult now in the current domestic economic context and India’s global invovement. Thus, when reports are carried about high level appointments in India, there is the usual grapevine about the appointee and what he or she can do. The ‘reforms’ lobby goes on over drive!Mr. Subba Rao is a bureaucrat and has grown with it. On all accounts, he has a creditable record. If the rumour that Montek Singh Ahluwalia was one of the contestants is true, it should go some way to explain the political acceptability of Dr. Rao to the present government. Dr. Man Mohan Singh would not have set aside easily the claims of Mr. Ahluwalia without good reason.Truth to be told, he is not acceptable to Left parties in the country and it hardly matters whether those parties are in the coalition government or not.They can check the process within the democratic framework in Parliament, Legislatures, streets and parks. If history has any lesson, it is that aggressive reformers are a liability in India and the future can be worse.Congress Party cannot hope to get back to power in Delhi next year on its own or even with a sizeable number.Dr. Reddy was aware of the socio-political context of reforms and calibrated the process. He would not allow himself to be pushed by zealots. It is not surprising that he was not popular with bankers and academics such as Percy Mistry and Raghuram Rajan. They blame Dr. Reddy for all the wrong reasons. Incidentally, it is ironic Dr. Rajan has recommended Islamic banking for India as suggested in a press report today!It is distressing that the global credit crisis which is ever expanding and bringing down bank after bank has not made them wiser and they advocate the model which the US (and European) banks took as the road to salvation. It is more important to see the institutional matrix and the scope for reform within it rather than posit abstract concepts and argue for over night changes.Dr. Subba Rao imbibes the same culture of academics and administrators to which Dr. Reddy belongs and he will steer the process in the same way. All central banks (including the US Fed, ECB and the BOE) are conservatives and it is invidious to brand Dr. Reddy as conservative. The job of central banks is not to rock the boat – if they can move it a bit faster it is a bonus. Viewed thus, Dr. Reddy’s record is better than any other central bank in the world on date.