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Speculation Flares On RBI Top Job

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With Reserve Bank of India Governor Duvvuri Subbarao's three-year term due to end in September, speculation is heating up over who will replace him if, as many in the market and government predict, his term is not extended.

Government sources said candidates for a successor would most likely include Raghuram Rajan, a University of Chicago professor and advisor to the prime minister; Economic Affairs Secretary R. Gopalan; and Kaushik Basu, a Cornell University professor and chief economic advisor in the finance ministry.

A new face at the top would be unlikely to result in a change in policy direction in a country where the government and central bank tend to be on the same page, although a year ago Subbarao was perceived to be more hawkish than New Delhi in its anti-inflationary stance.

The choice of who will head the central bank of Asia's third-largest economy after September is likely to be made by Prime Minister Manmohan Singh and Finance Minister Pranab Mukherjee. A decision may still be months away but is a hot topic of discussion in financial and government circles.

Mukherjee declined on Tuesday to say whether Subbarao would be appointed for another term.

"He's a good governor," Mukherjee told Reuters in Washington, adding that it was too soon for Singh to decide on another term.

Subbarao was not available for comment.

Whether it is Subbarao or a replacement, the next occupant of the 18th floor at the RBI's Mint Street headquarters in Mumbai faces an uphill battle against inflation heavily driven by forces beyond the control of monetary policy.

Those drivers include infrastructure bottlenecks, global commodity prices and the unpredictability of monsoon-fed agriculture.

The RBI is not constitutionally independent, and whoever heads it needs the political skills to manage the relationship with the powerful finance ministry.

While Subbarao has been credited with helping steer the Indian economy through the global financial crisis and improving communication with markets, he has struggled to tame inflation, which stands at 9 percent -- highest among major Asian economies -- despite 10 rate increases since March 2010.

"I am aware that the governor has copped a lot of criticism for his inflation management but to be honest, I think there were far too many causes of inflation which were beyond the realms of monetary policy," said D.K. Joshi, principal economist with rating agency Crisil in Mumbai.

It is Subbarao's disagreement with Mukherjee over a few issues that has prompted a widely held view among market players and government sources that his term may not be extended.

Belying his mild-mannered demeanor, Subbarao opposed Mukherjee's plan to set up a body to settle disputes between financial regulators, as well as the finance minister's plan to take over the task of debt management.

Joshi downplayed the notion of confrontation.

"Any governor who steps into Mint Street has to think RBI and monetary policy first, which is natural, never mind the fact that Subbarao and some of his predecessors have been mandarins at North Block," he said, referring to the building in New Delhi that houses several key ministries.

Also working against Subbarao: he was not appointed by Mukherjee, a Congress party heavyweight considered the second most influential person in government, but by his predecessor.

Mukherjee may well prefer to make his own appointment at the RBI in the same way he did not extend the services of former market regulator C.B. Bhave and former Finance Secretary Ashok Chawla, who were both hired by his predecessor and were widely regarded as competent bureaucrats.

Of the three RBI governors preceding Subbarao, two were reappointed and one, his immediate predecessor Y.V. Reddy, was not, although Reddy's term was five years.

The Candidates?
Among potential successors, Rajan has the highest global profile, thanks in part to his book, "Fault Lines: How Hidden Fractures Still Threaten The World Economy."

An economic adviser to Singh since November 2008 and former chief economist of the International Monetary Fund, Rajan is a professor of finance at the University of Chicago and topped a poll by The Economist publication

earlier this year of economists who have delivered the most important ideas in a post-crisis world.

Last year, Forbes named Rajan among the seven most powerful economists in the world, alongside U.S. Federal Reserve Chairman Ben Bernanke and Nobel laureate Paul Krugman.

Considered by bureaucrats to be close to the Prime Minister, Rajan's pro-market views that favour reforms and tighter fiscal management may put him at odds with those in New Delhi used to spending on programmes that reap electoral dividends.

A lack of work experience in India may also count against him. Gopalan, a long-serving bureaucrat and member of the elite Indian Administrative Service, is considered by politicians to be well-regarded by Mukherjee and would have the backing of India's strong civil servants' lobby.

Supporters in the finance ministry and the civil service say his administrative experience, including a stint in the commerce ministry, makes him the best candidate.

If chosen, Gopalan would follow a well-worn path from New Delhi to the central bank. The last three central bank chiefs were all chosen from India's bureacracy.

Of the three most-talked about potential candidates, Basu has the highest profile within India.

On a sabbatical from Cornell, Basu advises the government and the finance minister on matters including inflation and is said to enjoy the confidence of both Mukherjee and Singh.

Frequently in the public eye and widely quoted in the media, Basu is not a favourite of the civil servants' contingent but has many admirers at the top including Montek Singh Ahluwalia, a pro-reform member of the prime minister's in-house think-tank, and many influential ministers.

Not considered to be pushy or aggressive, Basu might be less prone to a run-in with the sometimes-cantankerous Mukherjee. The two hail from the eastern state of West Bengal.