Perhaps because the Modi government had some differences of opinion with two of the economist governors (one of whom was appointed by the Manmohan Singh government), there is a view that its political leadership prefers a civil servant to head the RBI, notes A K Bhattacharya.
IMAGE: Reserve Bank of India Governor Sanjay Malhotra. Photograph: Hemanshi Kamani/Reuters
Since its inception in 1935, the Reserve Bank of India has had 25 governors who have overseen India’s banking regulation and monetary policy formulation for close to 90 years.
Of them, as many as 14 were civil servants, seven were professional economists, three were from the financial sector, and only one from the RBI cadre of officers.
You may quibble over the names of a couple of the civil servants and argue that they were also trained economists.
But the preponderance of members of the Indian civil service at the helm of the RBI is a fact that has often been ignored in recent debates over how governments of late have relied more on civil servants to head the central bank.
Indeed, the Jawaharlal Nehru government had appointed four RBI governors during its entire tenure of about 17 years and all of them were civil servants.
To argue that Nehru chose civil servants because trained economists were not available to him would be puerile.
Not to be left behind, the Indira Gandhi government too had showed its preference for civil servants by appointing three of them at the head of the central bank.
Even the British rulers had plumped for two civil servants out of the three governors they appointed during the 12 years from 1935 to 1947.
Interestingly, the only governments that did not appoint a civil servant as the RBI governor were those led by Morarji Desai, Indira Gandhi in her second stint, and P V Narasimha Rao.
Sanjay Malhotra, its 26th head, is the 15th civil servant to occupy this coveted position.
For the Narendra Modi government, the balance, as far as the appointment of RBI governors is concerned, has now tilted in favour of civil servants.
Of the three governors it has appointed since its formation in 2014, two have been civil servants and one an economist.
Perhaps because the Modi government had some differences of opinion with two of the economist governors (one of whom was appointed by the Manmohan Singh government), there is a view that its political leadership prefers a civil servant to head the RBI.
One of those two economist governors used an e-mail to his colleagues to announce his decision to leave the central bank at the end of his tenure, and this disclosure was made by him about 10 weeks before the end of his tenure.
The second economist governor had major differences with the government on a variety of policy issues and decided to quit with a day’s notice, even though he had about eight months to go before the end of his tenure.
To be sure, those differences were of a serious nature. The governors had a point of view, just as the government of the day held a different perspective on the same issues.
This experience was perhaps one of the major reasons that drove the Modi government to look for an IAS officer to lead the RBI in 2018, believing that managing the relationship between the finance ministry and the central bank governor would be relatively stress-free.
The last six years have largely vindicated that faith. There were differences but they never became unmanageable or led to a public spectacle, as one saw during the tenures of the two preceding economist governors.
Those developments in the last six years were certainly reassuring for the Modi government. However, it would be wrong to presume that governments have always had a decent relationship with civil servants as governors.
The longest-serving RBI governor to date was a civil servant, but he had to quit over differences with the Nehru government after he decided to assert his autonomy against public attacks on the RBI by the then finance minister.
Nehru accepted the resignation noting that the RBI should know that it ‘has to advise the government, but it has also to keep in line with the government’.
In recent years, another civil servant governor had to face the challenges of a finance minister who, in the interest of maintaining economic growth, threatened to walk alone if he did not get the RBI’s support through an interest rate cut.
The short point here is that the preference for civil servants to head the RBI is not a recent phenomenon, nor has the appointment of civil servants as governors led to a complete disappearance of their differences with the government.
This is why the most striking aspect of the way the Modi government handled the leadership issue at the RBI in the last few weeks was the long delay in appointing a new governor.
This delay in making public its decision on the succession had undoubtedly given rise to avoidable uncertainty and speculation in the country’s financial sector.
Could the government have avoided making this announcement just a day before the incumbent governor’s term was to end?
The fact is that decisions on the appointment of a new RBI governor have been made months to several days before the end of the incumbent governor’s term.
For example, Y Venugopal Reddy’s five-year tenure as the RBI governor was to end on September 5, 2008, and the Manmohan Singh government managed to announce his successor on September 1.
In the case of Raghuram Rajan, his appointment was announced almost a month before he was to take charge as the RBI governor.
Urjit Patel’s appointment too was announced about a fortnight before his predecessor’s term came to an end.
Expectations are a little different for decisions on reappointing a governor (a term used in the RBI for extending a tenure).
The reappointment of Bimal Jalan, Duvvuri Subbarao and Shaktikanta Das took place a month-to-four months before their initial terms came to an end.
In retrospect, therefore, it would imply that if Mr Das were to be given a second extension, such a decision would have been made and announced weeks before his term came to an end.
It is, therefore, likely that the government may have been toying with the idea of reappointing Mr Das for another term and at the same time keeping its options open for hiring a new governor.
What those considerations were, it is difficult to fathom at present.
But this understanding was completely missed by the financial sector and its observers.
There was widespread expectation of a fresh term for Mr Das even a week before his second term was to end.
What the financial sector watchers also completely missed was the potential candidature of Mr Malhotra as the next governor.
Given his short tenure as the secretary in the department of financial services, Mr Malhotra will be no stranger to the banking system and the management of the external sector in addition to monetary and currency policies.
Two more key appointments will have to be made in the next few weeks before the government presents the Union Budget for 2025-2026 and the RBI’s Monetary Policy Committee reviews the monetary policy — both in the first week of February 2025.
The deputy governor in charge of monetary policy in the RBI and a new revenue secretary in the finance ministry will have to be appointed soon.
Economists can still look forward to filling the deputy governor’s position.
But that will also depend on how the newly appointed RBI governor looks at beefing up the composition of his new-look monetary policy committee.
Feature Presentation: Aslam Hunani/Rediff.com
