Some revelations on RBI, and advice for governors

We don’t really have a tradition of people who have held high office writing about how they’ve acquitted themselves. Montek Singh Ahluwalia is one exception. He’s written about his decade as deputy chairman of the Planning Commission. Hamid Ansari chose to give a detailed interview about his 10 years as vice-president. Now, C Rangarajan has published his account of his decades at the Reserve Bank of India (RBI), culminating as its governor, and his period as governor of united Andhra Pradesh, which included brief stints in Odisha, Tamil Nadu, and Kerala. It’s full of delectable details and amusing anecdotes.

The most revealing is his account of the economic crisis of 1990 when he was deputy governor of RBI. In August of that year, the bank wrote to the National Front Government to explicitly express “the need to approach international financial institutions to tide over the crisis”. But “no immediate action was taken” and Rangarajan says “this was a failure of political leadership”. He adds the government was “reluctant to act either because it had not recognised the seriousness of the situation or because it was ideologically averse to go to IMF”.

Not surprisingly, there was “a fast deterioration”. Four months later, “the reserves… were just equivalent to three weeks’ imports”. He adds, “the position… was so acute that there was some talk of selling properties owned by the government abroad”. One that was considered was the embassy in Tokyo.

In these circumstances, Rangarajan told me the bank was “prepared for a default… we thought of eventualities here, there and everywhere because we wanted to avert this”. The one that was chosen was to pledge 15% of India’s gold reserves, amounting to 46.91 tonnes, to raise a loan of $405 million. That may not seem like a big sum today but at the time “that amount was crucial… to prevent a default”.

The other fascinating story is from July 1991 and it’s about the devaluation of the rupee by the PV Narasimha Rao government, with Manmohan Singh as finance minister. It happened in two instalments and Rangarajan has made an important revelation about the second.

There’s a need here for a little background. For a while, there’s been anecdotal speculation that Narasimha Rao got cold feet after the adverse political response that followed the first instalment. He asked Singh to postpone the second. This is the point at which Rangarajan’s account becomes important.

Rangarajan reveals that on the morning of the second instalment (July 3, 1991) he received a call from Singh at 930 am. Singh asked him “how the situation was”, and he simply replied, “I have jumped”. Singh said, “fine” and the conversation ended.

Explaining his answer, Rangarajan told me the code RBI had adopted for the twostage devaluation was “hop, skip and jump”. The answer, “I have jumped” meant the second stage had been completed and couldn’t be stopped.

The book also has little gems from Rangarajan’s five years as governor and some good advice for today’s governors. During his stint in Odisha, Rangarajan discovered how strong the hold of astrology is on Indian politicians. Giridhar Gamang was chief minister and would only meet him at what he believed were auspicious times. “I shall call on you at 11:13 am,” he once said.

Now, for the advice present-day governors could usefully heed. “If the governor disagrees with what the chief minister is doing, he or she can discuss it with the chief minister or even write about it in their letter to the President. Beyond that, he or she cannot make a public display of disagreement.” Mamata Banerjee would warm to those words.

Rangarajan says when individuals who were previously leading politicians are appointed governors “the itch to act is evident sometimes”. His advice is pithy if not blunt: “This is what they must learn to control… governors have to understand not only the powers they have but also their limitations”.