An enduring conflict has regularly unfolded between the Indian government and the Reserve Bank of India (RBI), with governments looking to shape the central bank to support their economic agenda. In an environment where central bank independence is fiercely coveted, former RBI Governor Duvvuri Subbarao stood ground against governmental pressures, as revealed in his new book, ‘Just A Mercenary? Notes from My Life and Career’. Subbarao, during his tenure as RBI Governor between 2008 and 2013, faced consistent calls from the government for lower interest rates and higher growth estimates—a sentiment he vocally opposed.
Subbarao’s time at the central bank was marred by strained relationships with then Finance Ministers P Chidambaram and Pranab Mukherjee. Both ministers, according to Subbarao, were irked by the RBI’s anti-inflation policy which they believed was hampering economic growth. This tension came against the backdrop of the global financial crisis and the government’s struggles with policy paralysis, with the ministers viewing lenient monetary policy as a panacea for economic woes.
Chidambaram, returning to the Finance Ministry from the Home Ministry, endeavored to reverse the fiscal excesses of the prior period and concurrently pushed for an easing of the monetary regime. Subbarao, on the other hand, held his ground, justifying his decisions with objective consideration rather than succumbing to the government’s whims.
The disagreements weren’t solely about rates; they extended to the projection of economic figures. On one occasion, Arvind Mayaram, the Finance Secretary, and Kaushik Basu, the Chief Economic Adviser, challenged the RBI’s growth and inflation estimates, leading to accusations of the RBI’s recalcitrance in aligning with the government’s more optimistic view. Subbarao staunchly refused to skew the central bank’s assessments to engender positivity in public sentiment, as he saw it as detrimental to the RBI’s credibility.
Such government interventions were not limited to behind-the-scenes communications. Chidambaram, according to Subbarao’s accounts, took the extraordinary step of publicly expressing his disappointment with the RBI’s policy direction. The tensions were only exacerbated when Chidambaram, without consulting the RBI, established a committee for liquidity management—a move Subbarao considered an encroachment on his turf, prompting him to request, firmly yet unsuccessfully, the Finance Minister to disband the freshly constituted body.
The former RBI Governor also reflected on the role of the Prime Minister during these confrontations. According to Subbarao, Dr. Manmohan Singh maintained a neutral stance and never imposed his views, subtly offering support to the central bank’s autonomy by staying out of the fray.
Subbarao’s experience is not an isolated case. His predecessors, including YV Reddy, Raghuram Rajan, and Urjit Patel, faced similar standoffs with the government. Reddy, during his time from 2003 to 2008, had an uneasy relationship with Chidambaram which was only soothed after the intervention of the Prime Minister. Reddy emphasized that while the government has the authority to direct the central bank, it should be done with necessary consultation—a principle that has been put to the test repeatedly over the years.
The essentiality of central bank autonomy was a sentiment strongly echoed by Raghuram Rajan, who highlighted the importance of the central bank’s ability to resist government pressure. The saga of tussles peaked during the tenure of RBI Governor Urjit Patel when disputes over dividend payments to the government became public and culminated in Patel’s resignation.
This history of friction points to the vital balancing act between government objectives and central bank independence—a relationship well-articulated by then RBI Deputy Governor Viral Acharya’s warning in 2018 about the consequences governments may face for undermining regulatory institutions. The rich narrative provided by former Governors like Subbarao helps in understanding the delicate dance of governance and policy-making in India’s complex financial landscape.
