Politically Correct Subbarao Govt’s Safest Bet for Mint St



Subbarao may get extension as RBI Governor, but others in race too



The government has started the process of selecting the next RBI governor, with indications that the incumbent, Duvvuri Subbarao, could be in line for another term. Multiple sources within the government that ET spoke to said Subbarao, who will complete his three-year term in office this September, appears to be the best candidate to run India’s central bank for the next year or two. In their reckoning, the former civil servant, whose last assignment was in North Block where he was finance secretary, has had no major run-ins with the government as RBI governor unlike fellow regulator CB Bhave, whose term at Sebi was not extended. Moreover, he has synchronised policymaking with the government’s economic agenda. The other potential candidates for this job are Kaushik Basu, chief economic advisor in the finance ministry; and Ashok Lahiri, former chief economic advisor and now India’s executive director on the board of Asian Development Bank who met the PM last week. Kaushik Basu is known to enjoy an excellent rapport with both the prime minister and finance minister. A few months ago, he was sounded out for the job and is understood to have sought the advice of a few colleagues in the finance ministry. “I told him that he has the right credentials to handle the job. At the same time, I forewarned him about the administrative skills that would be required to head a mammoth organisation like the RBI,” said a former finance ministry official on condition of anonymity. Govt would Prefer to Play it Safe Now. That is why Subbarao’s administrative experience may count. Prime Minister Manmohan Singh, himself a former governor of the RBI dating back to the 1980s, will take a decision after consulting Finance Minister Pranab Mukherjee. Until now, the government has never had a formal selection process for the top job at Mint Street. The last time—in 2008—then finance minister P Chidambaram and C Rangarajan, then chairman of the Prime Minister’s Economic Advisory Council and also a former RBI governor, had held informal meetings with Subbarao and Rakesh Mohan, who was then deputy governor of the RBI, before choosing the former, senior officials said.
“This government is, in principle, not averse to giving extensions to top functionaries,” said a PMO official. According to officials, the government, which has faced flak for the controversial appointment of the chief vigilance commissioner, would prefer to play it safe and steer clear of any fresh controversy. “There is no reason to rock the boat now. Subbarao enjoys a good rapport with the finance minister. Last year, he had concerns about the RBI’s autonomy being undermined when the government announced the setting up of the financial stability and development council, or FSDC. But the RBI’s concerns have largely been addressed now,” said a regulator who did not wish to be identified. In the past, governors such as Venugopal Reddy, Bimal Jalan and C Rangarajan all enjoyed a five-year tenure, and the rules do permit for a fresh term of two years if the government finally settles on Subbarao. The RBI and Subbarao have been criticised recently for what economists term as being behind the curve, or not raising interest rates more aggressively to combat inflation. His baby steps approach or a policy of raising rates steadily has been panned by critics, though there is a recognition that the government ought to be pitching in more to tackle inflation. Subbarao, who succeeded the feisty YV Reddy as governor in September 2008, had a baptism by fire. Within days of taking over, he had to handle the repercussions of the global financial crisis after the collapse of storied investment bank Lehman Brothers. Their styles were contrasting—Subbarao preferring a more direct and open line of communication with financial market participants unlike Reddy who often surprised the market with his policy moves. Unlike the archetypal central banker, Subbarao has adopted a consultative approach and has communicated to the market in a simple style devoid of the customary central bankspeak or jargon. Officials who have worked with both the RBI and finance ministry say unlike Reddy, Subbarao is not dogmatic and even when he has differences with the government, is not viewed as being rigid. The closest he perhaps came to courting trouble was when he communicated to the government the RBI’s objection to provisions of a legislation that was seen as undermining the primacy of the central bank as the first among equals compared with other regulators in the financial sector. That and the stance of former Sebi chairman Bhave had evoked a sharp response from the finance minister in Parliament when he said “regulators did not come from heaven”. Says Abheek Barua, chief economist, HDFC Bank: “Subbarao was brought in with a specific mandate to handle the crisis and he has done a remarkable job. He has managed to handle many of the problems that arose from the crisis that still remains at the global level.” Barua reckons that Subbarao has been unfairly blamed for not handling inflation well as a significant part of inflation was due to structural and international factors, which he says the RBI cannot do much about. “If given an extension, his major challenge would be to manage inflation,” he said.

ET