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What Should be the Criteria for Choosing RBI Governor?

Spending a few years in Washington D C as India’s executive director at the International Monetary Fund or some Ivy League think tank should not be considered as a qualification for the post of Governor of the Reserve Bank of India.  Instead, deputy governors and even those junior to them who have spent the immediate preceding years working in Mumbai, and most of whom do have doctorates the PhDs in relevant sub areas, should have the first lien on the governor’s job.

The controversial term of the internationally renowned Governor of the Reserve Bank of India (RBI) Raghuram Rajan is ending in early September 2016. The indecision regarding his extension, and his subsequent decision not to seek a second term, have brought to the forefront a set of issues that have been neglected in  academic literature on central banking and in policy discussions in India. Specifically, how long should the term of the RBI governor be, how should the appointment be made, the terms and conditions of reappointment, what should be the size and composition of the monetary policy committee (if there is one) that sets the policy interest rate, how much extra voting rights and/or veto power should the governor have, and so on.

Policy makers and Parliament should have started to flag these issues long back, following the landmark agreement in September 1994 signed between Montek Singh Ahluwalia, the then Finance Secretary, and C Rangarajan, then RBI Governor, to phase out ad hoc treasury bills used to finance the fiscal deficit, thus paving the way for greater inflation control.   


Term Length and SEBI’s Performance


Unfortunately, there has been little headway for over two decades in discussing the length of the term of the RBI governor. Only after Rajan told a parliamentary panel that the term should be longer than three years did the media jump into the fray. Term length is no less relevant for good governance for a wide range of high level appointments. The media should also pay some heed to the just cause of extending the term length of others and the need for giving them advance notice.

The performance of the Securities and Exchange Board of India (SEBI) in this context is noteworthy. The SEBI chairman has a three year term which is extendable. G N Bajpai served from February 2002 to 2005, M Damodaran from 2005 to 2008, and C B Bhave from 2008 to 2011. The current SEBI Chairman UK Sinha, an IAS officer, has served from 2011 onwards, with two-year and one-year extensions after his initial term got over. Indeed according to newspaper reports Sinha had packed his bags and was getting ready to leave in February 2016 when his extension was announced.

It should be noted that despite the three year term limit and uncertainty about term extension for the chairman’s post, SEBI has done an excellent job.  In India’s liberalisation since 1991, and despite the legacy of the Harshad Mehta scam, SEBI’s has been the  real success story among public institutions. It has built an infrastructure for trading that is superior to some developed countries and to most members of the Association of Southeast Asian Nations (ASEAN) countries, whose overall economic performance has been much better. IAS officers like Sinha have quietly delivered a lot.[1]

The above issues apart, going by media reports, the choice of the new RBI governor is to be announced shortly. This is a decision of huge importance for India and for the economic well-being of the people in the years ahead. The criterion or criteria for the choice of RBI governor are worth discussing. This article critiques the long standing practice of India’s executive director to the IMF being appointed governor of the RBI .  


Doctorate as Prerequisite?


To begin with should having a PhD in economics be a prerequisite for becoming the governor? It is certainly the case that the appointee should know a fair amount about some permutation and combination of  the relevant sub areas like monetary policy, macroeconomics, corporate finance, foreign exchange and financial markets, the nitty gritty of commercial banking regulation and supervision.  However, whether the person should be an economist in the sense of having a PhD in economics, which seems to be the predominant view as to what the term stands for is another matter.     

Arguably, someone who has picked up specialised experience in the above listed relevant sub areas, and built up a good track record, has a strong basis to be considered for the post. Conversely, the appointee may have a PhD in economics, and be a high level lateral entry (such as a deputy governor level at the RBI), but unless the doctorate and subsequent publications are in the relevant sub areas listed above, the academic qualifications by themselves may be of no use. Of the various short listed names doing the rounds, only one has some academic expertise in the relevant subareas listed above.    

Although technically Governor Rajan’s doctorate is not in economics (an issue that Subramanian Swamy raised) he certainly had extensive knowledge in many of the relevant sub areas before taking over. Further he has an outstanding track record, going by his real time critique of Alan Greenspan at the farewell conference in Wyoming in December 2005. A detailed assessment of the track record of some central bank governors, with and without doctorates in economics would be useful, and in particular those shortlisted now for the governors’s post, but that is outside the purview of this article. Whatever the academic credentials and experience in the relevant sub areas, some specific  “real time” contribution should be an added qualification.  In general, that is hard to assess in a clear cut way, specific cases apart, such as that of Rajan in December 2005.

Whether commercial bankers – private or public sector – or private sector finance executives should be considered for governorship is a complicated issue.  Although they may be lacking an understanding of macroeconomics and monetary policy, they certainly have valuable experience for the position, compared to those from say, industry.  However, there is a reason why a commercial banker should perhaps not be considered. Since they have been on the other side of the fence from their regulator the central bank, they may not be suited for suddenly switching roles.  The experience of the US indicates that the revolving door between the Federal Reserve, the U S treasury and Goldman Sachs, via “regulatory capture” has done damage to the economy. Further, unlike commerical bankers and even Finance Ministry officials, only those with a monetary policy background, whether academic or \ via central bank experience, are likely to understand that cutting interest rates leads over time to higher interest rates, a central issue in assessing Dr. Subramaniam Swamy's critique of RBI policy under Rajan.    


Domain Knowledge  

It would be valuable to evaluate the importance of another criterion.   Crucial domain knowledge about the RBI, which is a vast, unique organisation, or any other central bank, can only be acquired by spending adequate time within it, or in related official positions.  Even for a much less important appointment, as highlighted by S. Bhattacharya in a recent newspaper article, “central Government rules say that no officer can become Joint Secretary at the Centre unless they have put in a full term as a Director or Deputy Secretary in one of the central Ministries” (Business Standard , 12th June 2016). 

It can be asked whether the same criterion apply to the governor’s and even deputy governor’s posts? Even if the economist who gets lateral entry at a very high level has genuine expertise in the relevant sub areas outlined above, (although that has not always been the case for the RBI) that may not be enough.  To build what G K Pillai, the former Home Secretary has called “institutional memory” requires a few years spent in the organisation or working in the finance ministry. This can be seen as a semi legal criterion.   

Following up on the above criterion of “institutional memory”, it is time to question a long standing practice for the choice of the RBI governor. The former deputy governor would go to the  IMF as executive director for India (more precisely the group of countries comprising India, Bhutan, Bangladesh and Sri Lanka) and then return as RBI governor.   Bimal Jalan,  Y V Reddy,  and Rakesh Mohan have all held the post  of executive director to the IMF. Presently, it is heldby Subir Gokarn. In India, economic policy at the highest level was and still is based on a revolving door between the IMF, finance ministry and RBI. 

Much earlier, this practice may have made sense. Prior to liberalisation, during the license raj days, India was hugely dependent on the IMF for foreign exchange.  It was vital for the finance ministry and the RBI to liaise with the IMF and World Bank and to stay in their good books, to ensure that the loans were granted on favourable terms. So there was some justification for the executive director’s post to be the stepping stone to becoming RBI governor.  Now there is none, since private capital flows have replaced grants and soft loans from the IMF, World Bank and other supranational agencies. 


Assessing the Contribution of IMF to India


If anything, the 1991 structural adjustment programme that the IMF imposed upon India was a great vindication of its basic orthodoxies, compared to say Russia, where things did not work well.[2] The liberalisation of 1991 started to pull India out of its poverty inducing socialist policies. Between 1970 and 1991, India’s growth averaged 4.3%, while from 1992 to 2013 it averaged 6.6%[3]   Beyond mere numbers, the standard of living as judged by the quality and variety of consumer goods and services rose hugely.  At a higher level of granularity, the IMF’s policies and activities and can be severely criticised, but that calls for another article.

The fundamental problem with the IMF is not that its basic policies are unsound, as the leftists and some others allege.[4] Its basic policies are all standard free market policies that have worked time and again. However, does the IMF deserve so much credit for the minor economic miracle since 1991?  Incidentally, this is a good question to ask in the 25th year since liberalisation. As a matter of fact, if India had only listened to economist B R Shenoy who had steadfastly advocated free market and sound money policies from the 1950s, there would have been no need for the IMF to impose similar policies in 1991.[5]        

Bauer’s critique of the predominant role of external experts in Indian economic policy is worth emphasising. Lord P T Bauer of the London School of Economics was a staunchly free market development economist from the 1950s.  His views evolved by observing rubber plantations in then Malaya, and by assessing the performance of agricultural state marketing schemes in many developing economies. Bauer was critical of the prevailing World Bank orthodoxy, which was then left wing.  He was vehemently against foreign aid.  In a touching tribute to Shenoy while delivering the B R. Shenoy Memorial lecture in Ahmedabad in March 1993, he stated:

Why should the Indian Government and its off-shoots and agencies rely on external economic advice? The tools of trade of an advisor on economic policy are microeconomic theory, macroeconomic theory (Primarily applied monetary economics and public finance) and knowledge of institutions and magnitudes. There is in India ample indigenous talent in analytical and applied economics------if the India government uses external advisors, it should realise that the advisors are likely to be people who advice will be in the direction of the maintenance and expansion of the role of the institutions supporting them (1998). (emphasis added by author)

Being a staunch proponent of free trade and an open society, Bauer’s critique of India’s dependence on external advice did not stem from nationalist or leftist paranoia, but reflected his awareness that some aspects of economic policy required domain knowledge acquired locally over years.  After 25 years of liberalisation, India still relies too extensively on the IMF and its network. The work of  Ashok Gulati, India’s agricultural expert is very much in the Bauer Shenoy tradition, reflecting a deep “knowledge of institutions and magnitudes”.   Bauer’s criticisms apply not just to the economic policy, but to social science academics in India as well.


Revolving Doors with IMF in Other Central Banks?


In short, spending a few years in Washington D C as executive director (IMF) or for that matter some Ivy League think tank should not be considered  a qualification for the post.  Instead, deputy governors and even those junior to them who have spent the immediate preceding years working in Mumbai, and most of whom do have doctorates the PhDs in relevant sub areas, should have the first lien on the governor’s job. At present, the incentive structure is skewed for RBI economists and staff at various levels towards going to Washington D C to get experience at the IMF, instead of remaining in India to get a better understanding of the situation. The huge tax free salaries in Wahsington D.C. greatly increases the skew"   

It would be useful to know how much time central bank governors and other top policy makers in ASEAN countries and in China have spent at the IMF.  My hunch is that many have spent long years working at their central banks or other ministries and organisations in their countries. In these countries, the doors to the IMF certainly do revolve, but less often and at lower levels. 

In this context, looking back at my years at the Federal Reserve Bank of New York, I recall that as economists we knew who the governors at the Board in Washington D C, and the 12 Federal Reserve District Bank presidents were.  One of the above would usually end up being appointed as the Federal Chairman, as happened with Volcker much earlier and Bernanke and Yellen later.[6] However, I cannot recall now if I was ever aware of who was America’s executive director to the IMF.     

The IMF website lists both director and alternate director to the IMF for various individual countries or country groupings. France, China U K and Germany are represented as individual countries while India heads the group of India, Bhutan, Bangladesh and Sri Lanka, with Subir Gokarn as Executive Director and  Swapna Gunaratna from Sri Lanka as Alternate Director. Now here comes the interesting part. For the US, the IMF website lists the director’s post as vacant and names Sunil Sabharwal as Alternate Director(as of 7 July, 2016). I have not come across his name earlier and would be curious to know how many of the financial elite in policy circles in Mumbai and Delhi have.[7] 

To summarise, spending a few years in Washington D C as executive director or for that matter some Ivy League think tank should not be considered a qualification for the post.[8] The present incentive structure at RBI is skewed against its staff remaining here to get a better understanding of India’s economy.   



[1] I am indebted to Amol Agrawal, doctoral candidate at IIM Bangalore for pointing out SEBI’s excellent performance.  

[2] It can be argued that Russia’s crisis arose partly because it over liberalized its capital account, which this author (e.g. Moorthy 2007), 2008) among others has been against.  One call perhaps label full capital-convertibility as the ultra-orthodoxy which has not worked well in many cases. Accepting the basic orthodoxy does not imply accepting full convertibility.

[3] I have avoided comparing full twenty five year averages since the data for the last two years under a cloud.

[4] Standard IMF policies are curbing the fiscal deficit, inflation control, focus on consumer price index which the Urjit Patel 2014 Committee on inflation targeting has rightly emphasized.


[5] For those unfamiliar with Shenoy’s views and his contributions to macroeconomic theory, including his generally unknown critique of Keynes’s 1930 Treatise on Money, I have summarized them in Moorthy (2014).  

[6] Alan Greenspan, who came from his Wall Street consulting firm to become Fed Chairman, was an exception.

[7] Besides his professional accomplishments, according to Wikipedia he is a noteworthy sportsman and was the  Chairman of the International Fencing Federation’s first annual Congress!

[8] I should clarify that I am questioning the practice of the revolving door from Executive Director IMF to RBI Governor. Some Governors who have been Executive Director have done an excellent job, YV Reddy in particular.  However, prior to going to the IMF he had worked for years in the Finance and related Ministries.  

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