Monetary Policy Making At Mint Road

Indranil Chowdhury teaches Economics at University of Delhi. He can be contacted at chowdhury.indranil[at]


Indranil Chowdhuri

Book Review: Who moved my interest rate? Leading the Reserve Bank of India through five turbulent years/D Subbarao/Penguin Random House India/New Delhi/2016.

Dr. Subbarao assumed the office of governor of Reserve Bank of India (RBI) just one week before the collapse of Lehman Brothers on 15th September, 2008 which commenced the worst financial crisis since Great Depression. It was, in true sense, ‘baptism by fire’ for him.

1aIn ‘Who Moved My Interest Rate? Leading the Reserve Bank of India Through Five Turbulent Years’ – a memoir of his RBI days, arguably the most arduous time for any central bank in the world – Dr. Subbarao, the 22nd governor, tells us that this book is not to explain his decisions taken as governor but to convey his perspectives on the issues and challenges that he faced. He as a career bureaucrat had the ambition of becoming the cabinet secretary and the job of governorship, according to him, was not in his career calculus. He had come to understand that it was P Chidambaram who was responsible for his appointment as the governor. However, after his initial 3 years were about to be over it was the Prime Minister Manmahan Singh who nudged the then Finance minister Pranab Mukherjee to extend his term of governorship for two more years.

The book is full of such anecdotes. We come to know that in 2012, Pranab Mukherjee inadvertently leaked the news of policy rate cut before the formal announcement. Another interesting tale that he narrates is about how Chidambaram pointedly ignored him and did not greet him in a dinner after a G20 meeting in Mexico. It left him an uncomfortable feeling and it was most probably due to their disagreement regarding the policy rate. One week before that Chidambaram had even gone public with his strong disapproval of the RBI’s stance on the policy rate.

During his tenure Subbarao changed the policy rate, i.e. repo rate total 23 times, raised it 13 times and lowered it 10 times. The rates had been increased to contain inflation as calculated by WPI. He thinks, and which is the dominant view in the policy establishment, that drivers of inflation were rise in wages without productivity because of MGNREGA which increased rural incomes resulting in increased demand for consumer goods and absence of consummate increase in production. Moreover, the MGNREGA wages were formally indexed which fueled further food inflation, he argues. Consumption led growth, large fiscal deficits were the other factors which led to high inflation, according to him.

He argues that government’s expansionary fiscal stance has to be controlled as that curtails RBI’s degree of freedom in monetary policy making. He also believes that the ‘central banks set the policy rate in the expectation that this very short rate term interest rate influences the entire interest rate structure in the economy which in turn effect output and prices’. Thus, to control inflation interest rate had to be increased and it should not have any effect on the growth rate as interest rate was not apparently a binding constraint for investment. He thinks that there were other impediments to growth than interest rate.

However, the government had a different view. P Chidambaram and Pranab Mukherjee both argued for rate cuts as they thought it was hampering investment and growth. Dr. Subbarao thinks that he had to pay a price for asserting the autonomy of RBI. Though he recommended but terms of two of his deputy governors were not extended by the government.

On inflation targeting Subbarao has an interesting position. In his first year as the governor he had the opinion that it was not advisable to move towards inflation targeting as the theory and practice of inflation targeting were in a flux. Moreover, he argued that in India short-term inflation was more driven by supply shocks and so he was apprehensive that whether RBI would be able to deliver on its promises. Besides these, having no single inflation index was also cited by him as a problem. However, he was not fully satisfied with the multiple indicator approach of RBI as it diluted accountability and confused markets. Next, he opines that since some of the facts underlying his reservations on inflation targeting had changed he has changed his reservation regarding inflation targeting. But the test of reserve bank’s inflation targeting framework would come, he writes, ‘when growth is trending down and inflation is trending up’.


D Subbarao (wiki photo)

Apart from this the book talks about his efforts to demystify the reserve bank, financial inclusion, financial literacy. It also deals with the policies that reserve bank followed to stop the depreciation of rupee due to the effects of tapering off the quantitative easing by Federal Reserve. He also briefly deals with different facets of communication by the central bank and how it affects the market. There is also a discussion on the chit fund scams in east India and the probable regulatory lacunae which allowed it to occur at regular intervals.

This is a very lucidly written book which takes us into the heart of monetary policy making by the reserve bank. It gives us an idea of the pulls and pressures the governor has to bear in his work. It touches upon the theoretical underpinnings of modern monetary policy making but it could have been more interesting if it had discussed in a bit more details the theoretical debates in monetary policymaking. Also, a more detailed description and chatracterisation of the so called ‘market’ players would have been interesting. Nonetheless, it is book which should be read by the students of economics as well as policy makers.