Who Moved My Interest Rate? Leading the Reserve Bank of India Through Five Turbulent Years

294 Pages·2016·1.14 MB·English

by  Duvvuri Subbarao

DUVVURI SUBBARAO

WHO MOVED MY INTEREST RATE?
Leading the Reserve Bank of India through Five Turbulent Years
PENGUIN BOOKS
Contents
Introduction
1. From Main Street to Mint Road
2. Baptism by Fire
3. Baby Step Subbarao
4. ‘When the Facts Change, I Change My Mind’
5. Inside the Chakravyuh
6. Demystifying the Reserve Bank
7. Rupee Tantrums
8. The Signal and the Noise
9. Walking Alone
10. Two More Years
11. What Does Your Promise Mean, Governor?
12. Goldfinger Governor
13. ‘Keep Your Ear Close to the Ground’
14. Sleeping at the Wheel?
15. Footloose in the World of Central Banking
16. Moving On
Author’s Note
Footnotes
4. ‘When the Facts Change, I Change My Mind’
5. Inside the Chakravyuh
6. Demystifying the Reserve Bank
7. Rupee Tantrums
9. Walking Alone
10. Two More Years
11. What Does Your Promise Mean, Governor?
12. Goldfinger Governor
13. ‘Keep Your Ear Close to the Ground’
14. Sleeping at the Wheel?
15. Footloose in the World of Central Banking
16. Moving On
Follow Penguin
Copyright
For my parents who taught me values
Introduction
‘May You Live in Interesting Times’
11 October 2008, Washington DC
It was a cold, rainy, gloomy October evening when finance ministers and central
bank governors from the G20 countries had assembled in HQ2 Conference Hall
of the international Monetary Fund (IMF) office complex in downtown
Washington DC. For sure, the ministers and governors had not travelled to
Washington for this special meeting of the G20; they were already scheduled to
be there for the annual meetings of the IMF and the World Bank over the
weekend.
The G20 meeting was a last-minute add-on, convened at short notice, to
discuss ‘the probable negative impacts of the present acute global financial
situation on world growth’. Given the uncertainty and turmoil of the preceding
few weeks following the collapse of Lehman Brothers in mid-September, the
anxiety of the finance policymakers to get together to exchange notes on what
had happened and what would likely happen was understandable.
Brazil was the chair of the G20 in 2008. I received the meeting notice on 9
October, shortly before catching the overseas flight out of Mumbai. On the
morning of the meeting, 11 October, when I was already in Washington, I got
another mail from the G20 chair asking if I could be one of the two lead speakers
in the second session of the meeting which would focus on the implications of
the current turmoil for emerging markets. The Brazilian finance minister and the
current chair of G20, Guido Mantega, much in the news in subsequent years for
his strong position on the international currency wars, was the other lead
speaker.
I was just over a month into my new job as governor of the Reserve Bank of
India but I was not new to the IMF and World Bank meetings which are held
twice a year—the spring meetings in April and the annual meetings in
September or October. As a mid-level official in the finance ministry in the late
September or October. As a mid-level official in the finance ministry in the late
’80s, it was my task to prepare briefs to the finance minister and the finance
secretary who would go for these meetings. As finance secretary myself since
early 2007, I had attended these meetings as a regular delegate. The G20 was a
later innovation but I was a little familiar with the set-up, having attended a
couple of G20 meetings earlier that year in my capacity as the finance secretary;
however, those were meetings of deputies (finance secretaries and deputy
governors). This meeting, of finance ministers and governors, was a notch higher
in the hierarchy. It was also, in the words of the convenors, ‘an extraordinary
meeting to discuss an extraordinary situation’.
I was quite irritated by this late request to be a lead speaker. I was fatigued
and jet-lagged, and my schedule for the day was clogged with meetings and
appointments with a lot of stakeholders who typically gather in Washington
during the week of these Fund–Bank meetings—possibly wanting to get a
measure of this unknown guy who had landed up as the governor of RBI. With
virtually little time and even less mind space to organize my thoughts, my first
impulse was to decline the request. But then ego came in the way. I was, by all
accounts, a greenhorn governor, unknown to most ministers and governors; yet
they chose to ask me to give the Asian perspective on what was turning out to be
a ferocious crisis. I had to take on the challenge! My experienced support staff,
efficient as they always were, cancelled a couple of appointments to slot a half
hour to tutor me for the meeting.
An Anxious G20
Since the mid-1990s, the biannual Fund–Bank meetings have also become a
high-profile venue for protests spanning a wide array of disparate causes—
repressive aid conditionalities, trade imperialism, climate change, gender
discrimination, child labour, poor governance and corruption, as well as a host of
other issues. Just as placards, slogans and hundreds of protestors from around the
world have become a standard feature of these meetings, so has tight security,
with the five or so city blocks that house the offices of the World Bank and the
IMF cordoned off and several layers of security to ensure access only to
authorized personnel. As a central bank governor, I enjoyed privileged security
clearance; even so, going in and out was always quite a hassle and I tried to stay
within the security cordon all through the business day.
within the security cordon all through the business day.
It is standard practice during these international meetings for the Indian
delegation to park themselves in the spacious office complex of India’s
executive director at the IMF which is located in the HQ1 building of the IMF.
The G20 meeting venue was in the adjacent HQ2. In other times, my inclination
would have been to walk across to the meeting but since that would involve
moving in and out of security, my staff navigated me through the basement
tunnel connecting the two buildings.
By the time I entered the meeting hall shortly before starting time, I was still
unsure about whether I could weave a coherent narrative from my jumbled
thoughts. The meeting was organized around a large quadrangular table with the
finance ministers and governors of the G20 ‘troika’ (Brazil, the current chair;
South Africa, the chair of the previous year, 2007; and UK, the chair for the
following year, 2009) seated on one side while the rest of us occupied the other
three sides. The ministers and governors sat in the front row with two deputies
per delegation in the back row. The managing director of the IMF, Dominique
Strauss-Kahn, and the president of the World Bank, Robert Zoellick, and their
support staff too were present. It was a fairly large meeting with about 125 of us
in there. The atmosphere was decidedly sombre with the usual pre-meeting
banter unusually low-key.
After a brief introduction by the chair, the meeting rolled on with Hank
Paulson, the US treasury secretary, giving an account of the hectic activity
during the week and the weekend prior to 16 September when Lehman Brothers
filed for bankruptcy, setting off tumultuous developments in the global financial
markets. Although Ben Bernanke, the chairman of the Federal Reserve, was not
listed as a lead speaker, Paulson had yielded to him. In his professorial baritone,
Bernanke gave an account of the unusual measures that the Federal Reserve had
instituted to inject liquidity into the financial markets which had gone into
seizure, and outlined the bespoke solutions they were contemplating for some of
the stressed financial institutions. The mike then passed on to Jean-Claude
Trichet, the president of the European Central Bank (ECB) who explained, in his
graceful, French-accented English, how the European banks, with large
exposures to the US sub-prime assets and their derivatives, had come under
pressure, how the contagion was spreading across Europe and what the ECB was
doing to cope with the evolving situation.
The anxiety in the room was palpable. Already a lot of hands had gone up to
The anxiety in the room was palpable. Already a lot of hands had gone up to
comment or ask questions, especially directed at the US, but the chair decided
that we should go on with the emerging-market perspective before opening up
for discussion. Minister Mantega is reasonably fluent in English, but I noticed,
after seeing him in several international meetings in later years, that he prefers to
speak in Portuguese wherein he comes off more articulate and decidedly more
forceful. Quite predictably, his comment, as the lead speaker, centred on the
paradoxical ‘safe haven’ effect—capital fleeing from emerging markets back
into the US even as the US was the epicentre of the crisis—which was
destabilizing emerging-market economies and complicating their
macroeconomic management.
My turn to speak came shortly after 7 p.m., an hour into the meeting, as the
earlier speakers had exceeded their time limits. I was going to make two points.
First, that the impact of the unfolding crisis on emerging markets had been more
severe than was understood or acknowledged internationally. The narrative that
had taken shape over the past few years that emerging markets had decoupled
from advanced economies—which is to say that even if advanced economies
went into a downturn, emerging markets would not be adversely affected
because of their robust foreign exchange reserves, resilient banks and sound
macro fundamentals—had been dented by the developments over the past few
weeks. Even though emerging-market financial institutions were not exposed to
toxic assets, the contagion had spread to them through the interconnections in
the financial system. Second, admittedly the market situation was uncertain and
unpredictable for advanced economies. But it was even more so for emerging
markets which had an additional layer of uncertainty because of not knowing the
precise channels through which the contagion would hit them. I suggested that it
was not enough that the advanced economies acted in coordination. They had to
keep us too in the loop, and on the inner track, and keep our interest in view
while shaping their policies.
The G20 delegations, except the ‘troika’, are typically seated in the alphabetic
order of countries. As it happened, the India seat happened to be close to the
door, at one edge of the rectangular table. Two minutes into my comments, the
door opened, and a man walked in quietly, but with self-assurance, trailed by
two burly grey-suited men of stern demeanour. I am sure they tried to be
unobtrusive but I was nevertheless distracted by this shuffle so close to my seat