In his latest book, "Just a Mercenary," former RBI Governor D. Subbarao delves into the intricate balance of freedom, responsibility, and the critical decisions that shaped his career. In an exclusive interview with Fortune India, Subbarao reflects on the pivotal choices he made during his tenure, the evolving role of central banks, and the intersection of technology and finance. From debating philosophical concepts at IIT to steering India's monetary policy through turbulent times, Subbarao shares insights into the complexities of economic governance and the future of financial stability.
If you could turn back the clock, what specific course corrections would you make based on your experiences and the outcomes of your decisions as the RBI Governor?
When people ask me that question, they’re asking with the benefit of hindsight. But I was acting in real time with the knowledge available to me at the time. Take the case of inflation control during 2010-11 when there was a high fiscal deficit, the Eurozone sovereign debt crisis was raging, and inflation in India was 9-10%. I was cutting interest rates only in baby steps. In hindsight, most people, including myself, believe that I should have made larger cuts.
But why were you doing that?
Because real-time data showed us that growth was still slow. There was global instability, and concern about financial instability was widespread. For example, the ECB had raised interest rates and had to backtrack. We were worried about maintaining credibility. All these factors combined led me to take baby steps. However, it turned out that growth was faster than we understood in real-time. That's one instance where I would have acted differently if I had known more.Many people ask if I would have emphasised or paid greater attention to communication as the RBI Governor. While I was aware during my tenure that what the governor says matters, and what the RBI says matters, the full importance of this only became clear after stepping down. When I lived in Singapore, youngsters would ask me on the street, 'Sir, in 2011, speaking to the IFC, you said this—what did you mean by that?' I realised then how closely people pay attention to the governor's words. I didn't fully appreciate this during my time in office.
Do you believe open communication is the way forward for central banks in general? Further, how transparent and open can a central bank governor be, considering the risk of being misinterpreted?
Given the risk of misinterpretation, governors and central banks should be very careful about their communication. However, the response should not be to remain silent. One of the lessons from the last two decades, particularly after the global financial crisis, is that communication is a very effective policy tool, especially when markets are nervous. Markets look to the central bank for guidance due to information asymmetry. Central banks are expected to know more than individual market participants.When providing guidance, central banks must be careful not to mislead markets or the public and avoid scaremongering. Instead, they should be level-headed and provide as much insight as possible about how the economic situation might evolve. It's a double-edged sword, but the solution is to improve communication rather than staying silent.
On the role of central banks, would it be fair to say that the growing wealth disparity—where the rich are getting richer and the poor are getting poorer—is a consequence of the easy money policies implemented by global central banks post-2008? These policies inflated asset prices, such as equities and real assets, which are reflected in the increased net worth of the wealthy today. In this sense, do you think central bankers are responsible for fueling this wealth disparity?
At the outset, I don't agree with the preface of your statement, which is that the rich are getting richer and the poor are getting poorer. That's not the case. Everyone is getting richer, but the rich are getting much richer, while the poor are getting only slightly richer. A rising tide lifts all boats, but it lifts different boats differently.Whether central banks should be concerned about the equity distribution consequences of their policies is a big question. Central banks struggle with this. If their core mandate is to control inflation and maintain financial stability, they must adjust interest rates accordingly, which affects people differently. As you mentioned, asset prices move up or down. Typically, assets are owned by wealthier people. So, if central banks reduce interest rates, poorer people who depend on income lose out, while wealthier people experience a wealth effect and get richer.There is a distributional consequence to central bank actions. One side of the debate argues that central banks should not concern themselves with distributional consequences and should focus on their core mandate. Any maldistribution that occurs as a consequence should be dealt with by politicians. The other side argues that central banks cannot be indifferent and must be sensitive to these consequences.In emerging economies like India, we need to be particularly sensitive to distributional consequences. For developed economies, this is more of an academic debate; for us, it is existential. Poverty or inflation is a regressive tax—it hurts the poor more than it hurts the rich. If the cost of a shirt goes up from Rs 1,200 to Rs 1,300, I might not notice it. But if the cost of rice goes up from Rs 40 to Rs 42, poor people notice it. Inflation matters significantly to them. Therefore, I believe central banks should be concerned about the equity effects of their policies, especially in emerging economies.
As a governor, you had reservations about subsidies. Have your views changed now that there is a Direct Benefit Transfer (DBT) mechanism to check leakages?
I don't know. It would be unfair for me to answer this question definitively because I haven't gone to villages and towns to check with people. But one thing is certain: digital transfers have prevented leakages, stopped corruption, and ensured money reaches people's accounts. That's very good. Digital technologies have indeed improved transfers.However, my point is, should we be transferring so much at all? Should governance be reduced to the government borrowing money and distributing it as transfers without focusing on the larger goals of governance, such as building sustainable societies and investing in ways that improve people's incomes on a sustainable basis rather than just supporting their current consumption?I agree that in a poor society where millions struggle for livelihood every day, it is necessary for the government to provide handouts to the most vulnerable. But this should be limited. It cannot be the entire business of governance. That is my point.
You've mentioned that in public policy, one cannot be completely immune to the government's intentions. In the context of central bank independence, how empathetic should a central banker be to the government's agenda?
The rationale for creating central banks at arm's length from the government is to achieve objectives like price stability and financial stability, which require policymakers to take a long-term view of the economy and implement decisions that may cause short-term pain. Politicians, dependent on public approval and short election cycles, are often disinclined to make such painful decisions. Therefore, central banks are established at arm's length from the government.When a central bank makes a politically painful decision, it is unfair to expect the government to simply accept it without discussion. There must be dialogue and consultation between the government and the central bank. The central bank should listen to all stakeholders, including the government, which is the first among equals.The central bank needs to consult with the government and consider its point of view. Ultimately, however, the central bank must decide what is best for the larger public good. If the central bank merely follows the government's directives, it undermines the very rationale for its independence. So, while central banks should be sympathetic and open-minded, they must act in what they believe is the larger public interest.
Given the growing debate around the inability of the US and other developed markets to control inflation and the argument against a 2% inflation target, do you believe the Reserve Bank of India has done a better job at inflation targeting compared to these developed markets?
The RBI has handled the difficult situation extremely well, balancing concerns of inflation, growth, rupee stability, financial stability, and more. However, comparing one central bank with another or one economy with another is tricky because each central bank acts in the best interest of its own economy.Historically, in India, we have had reservations about inflation targeting, partly because inflation here is often triggered by supply shocks, not just demand pressures. The primary policy tool available to the central bank is monetary policy, which controls inflation by managing demand. This raises the question: can monetary policy effectively control inflation if it is driven by supply shocks?The RBI's standard response is that while inflation may be triggered by supply shocks, if it persists, inflation expectations can become de-anchored. Therefore, monetary policy must be the first line of defence, even though it is not the best tool for addressing supply-driven inflation. We've historically faced this problem, and today, the US and Europe are facing similar issues. Their inflation is partly due to demand, fuelled by fiscal stimuli from both Biden and Trump, but also due to supply disruptions like the lockdown in China and other global supply chain issues.The question for global central banks is: is inflation targeting appropriate when inflation arises from supply shocks? What instruments or frameworks should be used for inflation control in such situations?
The IMF recently raised concerns about India's high debt-to-GDP ratio, and you've been vocal about this issue as well. What are your concerns regarding India's debt levels? As India pursues its $5 trillion GDP goal, can it maintain a sustainable debt-to-GDP ratio?
My concern about the debt-to-GDP ratio is as follows: both the central and state governments have accumulated significant debt over the years. As a proportion of GDP, this debt is increasing. The result is that interest payments are rising year after year. Today, interest payments are the single largest item of expenditure for the combined government sector and the fastest-growing. In some states, they consume as much as 40% of revenues, leaving less available for other expenditures. Much of the investment, whether in physical infrastructure or human resources, is being funded through borrowing. While borrowing and investing are necessary, we cannot sustain borrowing simply to cover spending. We must generate a revenue surplus. Growth will help mitigate this problem to some extent. Debt sustainability is achieved when the growth rate is higher than the interest rate, and a primary surplus is generated. Currently, we are not generating a primary surplus. To do so, tax revenue and GDP must grow rapidly. If we fail to achieve this, debt will continue to accumulate, leading to a fiscally challenging situation.
You once remarked that financial instability is like pornography—you can't define it, but you know it when you see it. Do you foresee an era of increasing financial instability that will require central banks to work more closely with governments, especially in India?
First, let me say that financial stability will be a recurring problem, partly because of financial globalisation. Events anywhere in the world can impact countries everywhere. For example, the potential collapse of Silicon Valley Bank last March sent tremors throughout the financial sector globally, even though it was just one mid-sized bank in California. Although banks worldwide did not collapse, there was significant concern. Financial instability is exacerbated by digital technologies and the rapid spread of information and misinformation. Financial instability can partly stem from expectations—if people expect a bank to fail and start withdrawing their money, it can create a self-fulfilling prophecy. Information spreads much faster today than it did in the past, making financial stability a bigger issue.There is a debate in policy circles about whether financial stability should be the exclusive concern of central banks or a shared responsibility with the government. I believe it should be a shared responsibility because if a bank needs to be restructured or recapitalised, it is the government that must do it. In some sense, the central bank is imposing a cost on the government, so there has to be consultation. This consultation should not be at a political level but at an operational level.
With technology at the forefront of banking, many bank CEOs claim they want to be seen as tech companies that also do banking. However, banks are struggling with legacy systems and are facing regulatory scrutiny. What is your analysis of the digital progress of Indian banks despite partnering with fintech players? Also, do you foresee a future where technology companies could enter the banking sector directly?
I'm not too clued into the latest developments, as it's been close to a decade since I left the RBI. However, what I want to emphasise is that banks are very special and are closely regulated because they hold people's deposits. To get a bank licence, you must establish a track record, credibility, and integrity. You cannot allow other companies, such as technology or telecom companies, to enter banking through the back door. Yes, a technology company can tie up with a bank to get a bank licence, but it cannot simply declare itself a bank. That is not acceptable because people's money is involved. If you want to be a bank, you need to obtain a bank license and be prepared to be regulated like a bank. You cannot be regulated like a telecom company and claim to be doing banking.
On your debate topic at IIT: 'That man is condemned to be free.' According to you, this means that every person must make choices based on their own experiences, and therefore, man is condemned to be free. Can you reflect on the choices you made based on your experiences both as a public servant and later as the RBI Governor, especially considering that you have said there were no rules to guide you in making those choices?
Most of us decide on our careers when we are about 17-18, and our aspirations are largely shaped by family, parents, and peers. When I started out, I had never met an IAS officer before I became one, nor was I exposed to civil service. In fact, as I mention in my book, about 20% of my batchmates were children of civil servants, either ICS or IAS officers. I did not have that privilege, so there was always a doubt about whether I could make it. But I made that choice anyway.
Similarly, when I joined the World Bank, the Bank was very keen for me to stay on. I was happy with the posting, doing meaningful work, earning good money, and enjoying job satisfaction and a good quality of life. If someone had told me then, 'You come back and you will become finance secretary and later the governor of RBI,' I would have run back immediately. But I wasn't sure, so it was a gamble. That was another significant choice I made.
As the governor of the RBI, you make many choices, such as managing inflation and stabilising the rupee. Although you rely heavily on accumulated experience and institutional knowledge within the RBI, you still have to make decisions. I was wrong-footed in some cases and did not always make the optimal choices.
You mentioned in your book the influence Commander Almeida had on you at Sainik School, emphasising character building over just personality development. As an academician at Yale Jackson School, how have you incorporated personality and character development into your syllabus, especially considering that in the coming decades there will be growing scrutiny about the choices central bankers make? Have you given a thought to this?
Frankly, I haven't focused on it much. I am teaching a technical course on central banking. However, your personality matters significantly as a teacher. Your ability to communicate with students and your effectiveness as a teacher depend on your personality. Character, however, is something that cannot be taught directly; it is imbibed from your parents, your environment, your school, friends, and university. It comes from your values.For example, as a teacher, are you in class two minutes before it starts, or are you always five minutes late? That reflects a value more than just a personal trait. You expect students to be on time, so you should be, too. When evaluating examination papers, if there are 25 of them, it can be tiring. But the important question is: are you paying attention and doing justice to each paper? It matters greatly to the students.These are considerations that arise as you perform your duties as a teacher. It's not something I explicitly teach, but I believe that during formative years in elementary or early high school, teachers must pay greater attention to character building — not by lecturing, but by setting an example.
How rewarding was it for you to put together a syllabus, something you hadn't done before? Did you find it to be a learning or an unlearning process?
It was a good learning experience. As a journalist, you know that reading is one thing, but writing is a different ball game altogether. You have to structure it and create a message, which requires more competence than just reading and understanding. It's the same for me as a teacher. Deciding on interest rates, rupee stabilisation, communication, or payment systems is one thing, but comprehensively putting it all together, building a storyline, presenting different sides of the same story, and provoking students to think critically is another. Nonetheless, It was a rewarding opportunity for me.
What was the part of the syllabus that you loved the most?
The part that I liked most was framing questions. Because I did that not only from my own study but from listening to the questions from students and so forth. I enjoyed reading their papers because some of them wrote well.
What was that one favourite question that you framed for your students?
Now, you've foxed me on that. It was something like this: If you were the governor of the Central Bank of Yaleland and faced a collapsing currency, and you raised interest rates but were criticised for using interest rates as an instrument for exchange rate management. Defend your action. It was a trick question designed to make students think critically.
How long is your engagement with the school?
I go every Fall for two to three months a year. Hopefully, I can continue as long as they want me to come. When you've invested time in drafting the syllabus and reading, there's a sunk cost, and you want to get the most out of that!
