Exclusive: Raghuram Rajan vs Jaitley wasn’t a one-off, his predecessor Subbarao faced it too with then Finance Minister, P Chidambaram

People in India are only familiar with all that went wrong between RBI Governor Raghuram Rajan and Finance Minister Arun Jaitley.
Interestingly, it turns out that this Rajan vs Jaitley episode wasn’t a one-off. Rajan’s predecessor and the RBI Governor, who has possibly steered India through one of its toughest economic conditions from 2008 through to 2013, D Subbarao, had a somewhat similar, maybe even more acerbic relationship with the then Finance Minister, P Chidambaram.

Opening up in an extremely candid, yet measured conversation about his time at the helm of the Reserve Bank of India, Subbarao gave Business Insider an insight into the troubled relationship he had with Chidambaram, mentioned in great details in his recently released book, Who Moved My Interest Rate?

One incident that strikes a chord instantly with the current RBI vs Govt scenario is that Subbarao was just few weeks into the job, when global markets were crashing, and world economies were well into recession, with India being one of the very few countries still growing at over 5% rates. What happened then was the then finance minister Chidambaram, without consulting with Subbarao, decided to create a liquidity management committee.

Subbarao writes in the book, “Chidambaram clearly overstepped into RBI turf as liquidity management is a quintessential central bank function. Not only did he not consult me, but he did not even inform me of this before the notification was issued.”

Speaking to BI he says, “The main mandate of all Central Banks in the world is price stability. Ensuring there is a long and steady view at inflation. Political executives in democracies such as this are always and mostly uncomfortable with this. For them it’s always a trade-off between the popular mandate of growth versus managing inflation, a function of which is hiking interest rates when required.”

He, however, says the tension between Rajan and Jaitley are of a different nature. He says, “Unlike the situation I was in, when India had to save itself from the economic meltdown of 2008, today we have reasonable growth. There will always be tensions between the Central Banks and the respective Governments, but, if handled professionally, there will be no hurdles to the economy.”

The book also has an entire chapter ‘Walking Alone’, which specifically talks about the strained relationship between Subbarao and Chidambaram.

A particular conflict of interest incident happened during the monetary policy review of June 2013, almost towards the end of Subbarao’s tenure, when Chidambaram was forcing him to cut the cash reserve ratio-the proportion of cash that banks need to park with the RBI at any given time-and Subbarao disagreed. He tells us, “There was a price to be paid. Such situations always have a trade-off and in this case it was the refusal of the government to extend the tenure of two of the deputy governors, Usha Thorat and Subir Gokarn.”

Subbarao, also has a word of praise for RBI Gov Rajan, when during the conversation we ask him how he would have handled the current situation of growing inflation, worsening health of banks in the form of rising bad debts and the constant pressure from the government to cut interest rates, he says, “I would have done exactly what Governor Rajan is doing now. There are situations when you have to be firm. Right now, from whatever I hear, dealing with inflation and managing the NPA situation should be the top priority of any RBI Governor.”