D Subbarao takes over as RBI governor from YV Reddy, in Mumbai on Sep. 5, 2008. (Photograph: RBI)

RBI Governors And The IAS: A Long History

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Shatikanta Das was named as the 25th Governor of the Reserve Bank of India this week, following high drama over the sudden exit of Urjit Patel from Mint Street.

Experts were divided on the appointment. Some lamented that Das’ appointment signified the return of the Indian Administrative Services lobby to the RBI, at a time when central banks require specialists and not generalists. Others, who were more hopeful, said the professional economists take a “my way or the highway” approach and were not interested in settling frictions with the government. As such, an IAS officer intricately aware of the workings of the government is better suited to the job.

Only time will tell which camp is right. But a look back at the history of the RBI shows that the central bank has a long association with the IAS.

Of the 25 governors that have led the RBI so far, 12 have been either from the IAS or the Indian Civil Services cadre. Of these 12, seven were from ICS officers. RN Malhotra was the first IAS official to be appointed to the position.

If you throw in the tenures held by these governors, you’ll find that in the 30,380 days since the RBI’s foundation, the central bank has been headed by IAS or ICS officials for 60 percent of those days.
RBI Governors And The IAS: A Long History

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After Osborne Smith, who was the first RBI governor and a professional banker, the next nine governorships until 1975 belonged to nine IAS officers. There were two interruptions in this period: PC Bhattacharya was from the Indian Audits and Accounts Service, and BN Adarkar was an economist and was a deputy governor before being promoted as RBI governor for a short time.

After this long tenure of IAS officials at the helm of RBI, we saw governors with a mix of backgrounds, including two economists, over the next ten years. In 1985, RN Malhotra of the IAS took charge at the RBI and was followed by S Venkitaramanan, who served for two years and played an instrumental role during the 1991 crisis.

RBI Governors And The IAS: A Long History

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Post-Liberalisation Governors

Post liberalisation, the structure of the Indian economy started to change and, over a period of time, its integration with the global economy increased.

In the first decade post liberalisation, the RBI was headed by two economists — C Rangarajan and Bimal Jalan. The former served for just under five years and the latter for a little more than five years.

After Jalan demitted office, his deputy governor YV Reddy took charge. Reddy, while a trained economist, was also from the IAS. As was D Subbarao, who took over after Reddy completed his five year tenure.

The baton was handed back to professional economists when Raghuram Rajan and Urjit Patel headed the Reserve Bank. With the appointment of Das, the IAS comes back to Mint Street after only a short gap of about five years.

RBI Governors And The IAS: A Long History

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Finance Ministry-RBI Revolving Door

Interestingly, even though there have been 13 non-IAS Governors, most of them had served in the Finance Ministry or another wing of the government at some time or the other.

BN Adarkar, IG Patel, Manmohan Singh, Bimal Jalan and Raghuram Rajan — all were either economic advisers or held a position in the Finance Ministry.

In fact, CD Deshmukh and Manmohan Singh moved on to become Finance Ministers after being RBI governors.

Only in the case of KR Puri (who was from LIC), Amitav Ghosh (who was a professional banker), C Rangarajan (economist) and Urjit Patel (economist) there was no prior government or Finance Ministry connection. Rangarajan headed the Prime Minister’s Economic Advisory Council at a later stage.

In fact, the third volume of RBI History (1967-81) tells us that politicians such as Madhu Limaye raised a red flag about the appointment of civil servants as governors in the Parliament in 1968.

The then Deputy Prime Minister and Finance Minister, Morarji Desai, assured that in the future, civil servants would not be appointed as governors. The government, however, did not keep this promise. In 1974, Madhu Limaye stated in Parliament:

“I had suggested several times to Mr Morarji Desai, when he was the Finance Minister, that it was wrong to continue to appoint the ICS officers as Governors of the Reserve Bank. Appoint as Governor only experts who have sound knowledge of fiscal and monetary policies. However, the Government has not so far taken any policy decision in this regard. I would, therefore, request Sushilaji … to clarify on this point … and to state that in future no ICS and IAS but only experts will be appointed as Governors of the Reserve Bank.”

Similar concerns were raised by former Governor IG Patel in an interview in 1993:

Why the Governor of RBI should … nearly always come from the secretaries of the Ministry of Finance? Why not a worthy academician or even a successful businessman who has the understanding? I think we need to bring a new spirit.
IG Patel, Former RBI Governor

Though, at the time of this interview C Rangarajan, who was a professional economist, was the governor.

In final analysis, history shows that debate over appointing an IAS official as RBI governor has existed through most of the RBI’s history.

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The Debate Over Autonomy

The other thing that is not new is debate over autonomy. Although this debate has taken some interesting turns over the years.

The first volume of RBI History (1935-51) tells us that the British government was concerned about the autonomy of the central bank and did not want the central bank to look like another handmaiden of the government. It saw the appointment of the first governor as ‘a point of vital importance’ and wanted to signal autonomy via the appointment. Thus, the government chose Osborne Smith, who was heading the Imperial Bank at that time and was known for his independent outlook. A passage from the first volume says:

Apparently, while a British Governor could have been picked from the higher administrative ranks of the appropriate services of the Government of India (indeed Mr. Taylor himself), there was a desire to have as the first Governor someone outside the Government, in order to demonstrate the principle of independence of the Bank about which very strong sentiments had been professed by Government.
RBI History Volume-I

Osborne Smith did not last long and resigned within one and a half years in October 1936. He finally stepped down in June 1937 and in came the first ICS officer to head the central bank.

As an aside: Can anyone guess what started the frictions between the government and Governor Smith?

Well, the governor preferred easy monetary policy given the economic conditions of the time but the government wanted tighter monetary policy to maintain the peg of Indian Rupee to the Sterling Pound! Smith lowered the Bank Rate (then policy rate) from 3.5 percent to 3 percent on November 1935 (the Bank Rate then remained unchanged at 3 percent till 1951) leading to frictions and eventually Smith’s resignation.

Such are the ironies that are thrown up when one reads history of Indian central banking and its bankers.

Amol Agrawal is a faculty member at Ahmedabad University. He has a PhD in Indian Banking History and writes the Mostly Economics blog.

The views expressed here are those of the author and do not necessarily represent the views of BloombergQuint or its editorial team.