Tales from Mint Road IRRATIONAL CHOICE
On August 3, 2010, the Reserve Bank of India (RBI) issued a bland press release with the title “RBI revises Portfolio Allocation of Deputy Governors” (DG). The revised portfolio allocated 10 areas to Shyamala Gopinath, nine to Usha Thorat, seven to Subir Gokarn and just four to K C Chakrabarty, which included the “Rajbhasha Department.” Banking circles were aghast. The RBI had just handed down a nasty public humiliation to Mr Chakrabarty, the deputy governor, known for his blunt talk. He would now oversee Customer Services, Information Technology and Inspection. He was kicked out of all core areas like monetary policy, foreign exchange and banking. Who was behind this crushing relegation of Mr Chakrabarty? And what for?
It was an extraordinarily vindictive hit job by a supposedly benign, erudite and even fun-loving RBI governor, Duvvuri Subbarao (who could break into a lungi dance, to the delight of his audience). Mr Subbarao, who has recounted his RBI years in a book titled Who Moved My Interest Rate? decided to banish Mr Chakrabarty to the wilderness because of comments the latter had supposedly made in an offthe-record view on where interest rates should go. Mr Subbarao, who portrays himself in the book as an independent thinker doing the right thing while New Delhi was undermining him, of course, does not refer to this astonishing episode of pettiness. What really happened?
A story was attributed to an “RBI official” just after the RBI’s monetary policy announcement on July 28 was reported by the media. The official, supposedly Mr Chakrabarty, is reported to have made two points: interest rates should have been higher by now, and that the RBI is not the real monetary policymaker, hinting that the finance ministry dictated the interest rates. While most new reports were staid and factual, one particular report, by Newswire18, was specifically slanted, to foment trouble. The report described Mr Chakrabarty’s views as “vitriol”, “untamed hawkishness”, “no holds barred attack”, “loose-cannon” and “shock, anger & awe”. The report even quoted an unnamed bond dealer asking if “there is a mutiny or what”. An apparently livid Mr Subbarao decided that Mr Chakrabarty needed to be banished to the boondocks.
Mr Chakrabarty, who had his feet well-grounded in both business banking and consumer issues, was a rare commodity in the central bank because of his clear thinking, ability to learn, frankness, drive and integrity. He is surely outspoken (in a brief reference to him, Mr Subbarao calls him irascible) and has frequently jousted with corporate India and bankers. At various forums, Mr Chakrabarty has got into acrimonious arguments, but he has usually turned out to be right subsequently. He was correctly arguing that banks should not favour new customers with lower rates at the cost of existing clients. The RBI, which invariably takes the side of banks in any conflict with customers, allowed banks to get away with such unfair treatment of borrowers. With great effort, Mr Chakrabarty stopped this unfair practice only in one area: home loans. Interestingly, Mr Subbarao does not refer to consumers in his book — in the proud tradition of successive RBI governors (except Y V Reddy), who thought it beneath themselves to address customer issues.
Was Mr Chakrabarty right in his views that inflation was rising and the RBI was behind the curve? Mr Subbarao held on to low rates for a year and then from July 2011 suddenly started scrambling to ratchet them up. He stood exposed as being behind the curve, which he now blames on bad data. With the same “bad data”, Mr Chakrabarty, a PhD in statistics, had said in July 2010 that RBI must raise interest rates, for which he was punished.
Two months after his vengeful action against Mr Chakrabarty, Mr Subbarao set tongues wagging in Mumbai’s banking circles again when he went out of his way to seek an extension for Ms Thorat, whose term as a DG was expiring in October 2010. He writes that Ms Thorat was “eligible for reappointment for another two years in accordance with the convention followed till then of reappointing deputy governors till they attained the age of sixty-two years.” But, New Delhi got wind of it and told Mr Subbarao that the finance minister has approved the constitution of a committee to select Ms Thorat’s successor.
Mr Subbarao then took the extraordinary step of seeking a meeting with Pranab Mukherjee, “incidentally one of only two occasions when I met him one-on-one”, to lobby for Ms Thorat’s appointment. “I told him that the government had appointment Shyamala Gopinath, another deputy governor, an identical case, under the same rule, and added for effect that he was the finance minister who had approved it.” Is there such a “rule”? I checked with my sources in RBI and they say “there is no provision for automatic extension for governor and DGs. After the expiry of terms, they can be re-appointed but it is entirely the government’s prerogative.” In a final twist to all these episodes involving DGs under Mr Subbarao, Mr Chakrabarty, who was stripped of most of his portfolio in 2010, not only got his portfolios fully restored (and more), but was reappointed as a DG for two years in 2012 and resigned in March 2014, three months before his term was to end.