Emerging Leader: Duvvuri Subbarao, governor, Reserve Bank of India

Image Credit: hari2985 under a Creative Commons license

This is not an easy time to be a central banker. The global economy has recovered only in fits and starts since the 2008 financial crisis. The tender green shoots of economic optimism have repeatedly failed to take root under the harsh glare of global risks, such as the fiscal crisis in some of the developed countries, higher energy and oil prices, as well as devastating natural disasters like last year’s Japanese earthquake. This period has been even more challenging for emerging market central banks that were forced to adjust their policy direction according to inflation trends and the unusually high volatility in currency markets. Among the large emerging economies, India has seen the most persistent inflation risks in recent years, while the country’s fiscal health remains one of the most fragile. As Businessweek magazine said in 2010, ‘Ben Bernanke and Jean-Claude Trichet may seem to have the toughest central banking jobs going – until you consider Duvvuri Subbarao’, India’s top central banker. Still, even in this difficult environment, Subbarao has successfully calibrated monetary policy responses to prevent a steep decline in the growth rate and to contain inflation in India.

India’s central bank is one of the most respected institutions in the country and has largely managed to thwart government influences on its policies, unlike some of the other emerging countries where the central bank is often an extension of the government. When Subbarao took over as the governor of the Reserve Bank of India (RBI), after a long career that ended as the senior most bureaucrat in the finance ministry, there were a few who saw the move as an attempt by the government to have greater influence over monetary policy. Though it is not unusual for former bureaucrats to head the RBI, the current Indian Prime Minister Manmohan Singh being the most famous example, it was speculated that Subbarao was given the job as he would be more accommodative of the government’s economic policy priorities.

‘There are serious concerns about the macro economy, about our
policy environment, and about our governance. We should prove to
the world that the current downturn is just a short-term phenomenon
and that the long-term growth drivers will come back into play.’

- Duvvuri Subbarao, governor, Reserve Bank of India, April 2012

But such apprehensions have been mostly laid to rest as Subbarao has adhered to the RBI’s policy mandate. He quickly trimmed interest rates in the second half of 2008 to help an economy reeling from the global financial crisis, but reversed policy direction as the stronger than expected recovery during the following year pushed up inflation risks. When the Indian economy started showing signs of a slowdown during the second half of 2011, Subbarao ignored calls for interest rate cuts as inflation was still rising. He resolutely maintained that policy position until this month, when moderation in the rate of increase in producer and consumer prices allowed the RBI to lower its guard.

For those who know him or have looked at his career record, Subbarao’s success should come as no surprise. After earning a graduate degree in Physics from the Indian Institute of Technology, Kanpur, where he was awarded the Director’s gold medal, Subbarao topped the highly competitive test to join the Indian Administrative Service (IAS), an elite cadre of bureaucrats. Subbarao soon met his future wife, who was his junior in the IAS. They both started their respective government careers at his home state of Andhra Pradesh, but Subbarao later took a leave of absence and moved to the U.S. to study economics at Ohio State University.

Though he returned to India after graduating from Ohio State, his growing passion for economics brought him back to the U.S. within a couple of years. He joined the prestigious Massachusetts Institute of Technology to study quantitative economic modeling, on a Hubert H. Humphrey Fellowship awarded by the U.S. Department of State. Incidentally, Subbarao’s wife also won the same fellowship several years later and studied at the University of North Carolina.

Subbarao’s academic ambitions were satiated only after he earned a doctorate in economics from Andhra University, a decade later. But the several years he spent studying economics paid off very well when Subbarao became a senior economist for Africa and subsequently the lead public sector specialist for the World Bank in Washington, D.C. On his return to government service in India, he was appointed to the Prime Minister’s Economic Advisory Council as its secretary, before taking over as the top bureaucrat in the finance ministry.

Despite his apparent success over the last few years as RBI governor, Subbarao’s challenges are far from over, even as he nears the end of his current term by next year. While the RBI is receiving bouquets for its policy management, the government has lately received mostly brickbats. In the absence of a strong political mandate, the government has not been successful in introducing much needed reforms and reining in the fiscal deficit. If the fiscal balance worsens further, even the good work done by the RBI could be negated. In a speech to top government officials, including Prime Minister Singh, Subbarao was bold enough to acknowledge that the country’s fiscal deficit and short-term public debt levels are disturbing, as reported by the Press Trust of India (PTI). Like his predecessors, Subbarao has also argued against removing all restrictions on capital inflows and outflows, without first addressing the fiscal deficit. In the same speech, Subbarao said premature capital account liberalization can be harmful as it would make the country ‘vulnerable to volatile external cycles, sharp fluctuations in exchange rates and asset price build-up and bubbles’, the PTI reported.

Even if he achieves nothing further, Subbarao’s legacy is no doubt secured as the RBI governor who successfully steered monetary policy during one of the most stressful periods in financial history. But Subba, as he is known to close friends, is unlikely to rest on his laurels. Several decades of experience as a public official are whispering in his ear to remain laser-focused on the several risks the Indian economy currently faces. The majority of Indians would now be thankful that, in Subbarao, the government picked one of the most able people to do that job.