In his book, ‘Forks In The Road’, Rangarajan is open about what he did when he was RBI governor.
All Reserve Bank of India governors are quickly writing memoirs once they exit office, which is an interesting trend for the publishers and the readers. Probably they could not write while in the hot seat. The one written by the former RBI governor and economist, Dr C. Rangarajan, stands out. This is because it is brilliantly written and Rangarajan is very open about what he did when he was the RBI governor. He was, definitely, one of the most influential figures who shaped the foundation of the Indian economy. His book, “Forks In The Road: My Days At RBI and Beyond”, published by Penguin, has those tough, happy and landmark moments.
Rangarajan, also a former Member of Parliament, has said that the thought of the book occurred to him when he was in office but the idea took shape after the Congress-led UPA government lost the big elections to the BJP-led NDA in 2014. It is a fascinating read because Rangarajan appears very forthright in mentioning a host of things, he actually emphasises a lot of his actions that came under some strict scrutiny by the media.
His writings show Rangarajan was a man in total control, and not a puppet of the government. He had some great thoughts that helped him make very crucial decisions. It was quite natural for me to look into the decision of India pledging gold to foreign banks, something many still consider as a national shame. So, I read what Rangarajan had to offer as a counter. It happened in 1991, and obviously India was in a very difficult situation and the government had to raise resources. So, the decision was taken to send gold out and pledge 46 tonnes of the yellow metal to raise cash. A special plane took it from Bombay (not Mumbai) to the UK, which helped India raise some $500 million.
Today, it genuinely looks like a very small amount.
Those were different days and the government, says Rangarajan, had no other option. I am sure the government must have weighed all options, including the fact that the move would trigger tremendous backlash because gold is holy in India, the best investment for people across South Asia. And also, in other parts of the world. Obviously, the experience was very traumatic for the government.
If you read the book, you will realise why Rangarajan is still considered one of the finest RBI governors.
The first, as he says in the book, was to make the apex bank independent, especially in terms of handling the crucial monetary policies. Rangarajan says he revoked an agreement between the Reserve Bank and the government under which there was an automatic monetization to fiscal deficits. So, what does this mean? Well, the book explains it nicely.
It means when the government’s cash balances got depleted, it would issue ad-hoc treasury bills in favour of the RBI to get cash. In other words, it is automatic monetization of the fiscal deficit. The book says this process got revoked and, in turn, enabled RBI to get a greater control over both the issue and control of money supply. Rangarajan calls it a great step for the country’s apex bank to gain autonomy in terms of pursuit of its activities.
The book also talks about another significant change, something relating to the market determined exchange rates and capital flows coming in and going out—all impacting the exchange rate. So, what did Rangarajan do? Well, the book says it very clearly.
Prior to 1993, Reserve Bank of India every morning determined the day’s rate of exchange. And this coexisted with the system of import controls on goods. How did it work? If a particular rate is fixed, the only way to push effective implementation is to control the activities. But in 1992, the RBI moved to a dual exchange rate system and in 1993, we moved to a market-determined exchange rate.
This was a bold step.
So what did the RBI, sorry Rangarajan do? The apex bank said it would intervene in the market when needed, else let the market determine what the exchange rate will be. This was not all. The RBI then signed a current account convertibility clause with the Washington-based International Monetary Foundation (IMF). It was a very significant one wherein it was decided that the RBI would not put restrictions on current account transactions. This is not all, the RBI, under Rangarajan, did not agree to capital account convertibility despite pressures from the IMF. India, thanks to this brilliant RBI governor, told the IMF in no uncertain terms that New Delhi would think about it but not right then. I remember how the current account convertibility was signed by the RBI during the UPA regime. For a billion-plus nation like India, it is almost like getting to play the FIFA World Cup football. This news does not trigger breaking headlines but is very significant for the growth of a nation.
Rangarajan writes like a brilliant flow; he in his book has reminded India what he did and why he should be remembered. I remember some of the big buck steps he took during his tenure, like plugging prudential norms and a host of other measures to strengthen India’s capital adequacy ratio to strengthen the nation’s banking system and make it competitive.
And then came the mother of all changes, a great move that changed India and its banking system. The RBI issued licences for the banks to be set up by the private sector. A whole new set of private sector brands joined the race and started operations. But the move, India must remember, came around the time Rangarajan headed RBI.
Rangarajan is now an observer of the country’s banking systems and he also has some pieces of advice for the Modi government. I could not meet up with him personally but read some of his interviews where he has advised the government to be brutally realistic and not work in isolation. For example, the Ukraine-Russia war is raging, and the RBI, felt Rangarajan, must work the way some of the central banks of other countries are working. He feels monetary tightening is a must for both domestic and external reasons. India cannot do the opposite of what others are doing.
He also wants the inflation to be brought down below 6% from the current position of 7% and a little above. He is happy India is doing very well on the services side and that the trade deficit is high on the trade in goods side. But it gets compensated by the services sector surplus. Hopefully things will change when world trade gains momentum. And yes, India must encourage domestic investment by creating the right climate and not a climate of disruption as many corporations allege. India must become an ideal investment destination.
A brilliant read.