Baptism by Fire and Beyond

In September 2008, just days after taking charge as Governor of the Reserve Bank of India, Duvvuri Subbarao found himself at the epicentre of a once-in-a-generation global financial meltdown. Within two weeks of his appointment, Lehman Brothers had collapsed, global markets were in free fall, and policymakers across continents were scrambling for answers.

In this wide-ranging and candid conversation for BasisPoint Insight with Manoj Rane, a financial market veteran, Subbarao revisits those early days when crisis management replaced ceremony, and when instinct, teamwork and communication became the central bank’s most potent tools. He recounts the late-night call that brought him to Mint Street as Lehman filed for bankruptcy, the rapid decision to ring-fence Indian subsidiaries, and the early lesson that even an “obvious” reassurance from the central bank can calm markets in moments of panic.

The interview moves from the global financial crisis to the turbulence of the 2013 taper tantrums, when the rupee plunged, and India was bracketed among the “fragile five”. Subbarao reflects on deploying what he once termed the “brahmastra” of interest rate defence, on the unpredictable power of communication, and on how markets respond as much to tone and body language as to policy action.

Beyond crisis episodes, he addresses inflation targeting, institutional tensions between North Block and Mint Street, and the evolving debate on central bank independence in an era when political scrutiny of monetary authorities has intensified worldwide. 

He also offers a measured assessment of India’s current macroeconomic position, questioning whether headline growth numbers mask deeper concerns around employment, manufacturing and consumption.

This is not merely a retrospective. It is an institutional memory of how decisions are made under pressure, how credibility is built and tested, and how context shapes judgement in central banking.

Read the edited excerpts of his Q&A aired in two parts on BasisPoint Insight’s YouTube channel.

Q: You took charge at the RBI in September 2008, and within two weeks, the global financial crisis erupted. How did you experience it, and how did you respond?

A: Thank you for the opening question, because it allows me to tell a story.

I became Governor of the Reserve Bank of India on the 5th of September 2008. The 5th of September 2008 is a historic date in world finance, not because I became Governor, but because of the dramatic events that took place in the couple of weeks after that.

On 5th September 2008, I became Governor.
On 7th September, Fannie Mae and Freddie Mac crumbled.
On 8th September, Countrywide went down.
On 10th September, Merrill Lynch vanished.
On 12th September, AIG came to the brink of a meltdown.
On 13th September, Washington Mutual was liquidated.
And on 15th September, the grand finale — the big bang — Lehman Brothers collapsed.

The collapse of Lehman Brothers — their filing for bankruptcy on 15th September 2008 — plunged the world into a devastating financial crisis.

Global finance came close to a near-death experience. The global economy was spiralling into a serious downturn.

Everywhere, markets were seized with fear and panic. Policymakers, central bankers and governments were bewildered and anxious. People everywhere were worried about their money. There was a lot of uncertainty around the world.

The financial crisis, which originated in the subprime sector of US finance, ricocheted around the world and spread to every other country. And it spread to India as well.

The rupee crashed. Our growth slumped. Our banks panicked. Our financial markets went into a tizzy.

So it was an extraordinary crisis, with a great deal of uncertainty all around the world, including here in India.

I was thrown into managing that as a greenhorn Governor — a once-in-a-generation crisis.

So it was indeed a baptism by fire for me.

Q: Lehman’s collapse caused losses worldwide, but in India, the RBI moved quickly and ring-fenced its local operations. Was that a deliberate and immediate decision?

A: Oh yeah, absolutely. In fact, the first thing I did, you know, when Lehman Brothers filed for bankruptcy around noon New York time, on the 15th of September, was at about 9:30-10 p.m. in India. Shyamala Gopinath, who was deputy governor at that time, called me at 10 p.m. and said, “Sir, can you come to the office because Lehman Brothers has filed for bankruptcy and we have to do something.”

I was a bit surprised because, over the previous 10 days, as I just recounted, a number of institutions had fallen. So I asked her what was special about Lehman Brothers that required us to go to the office immediately. She said, “No, this is different because the Fed and the US administration allowed it to fall. And therefore, there might be some reaction in our markets tomorrow.” 

So we all went to the office. I arrived at about 11 p.m. We brainstormed for about two to three hours, reviewing the situation and the potential impact on India. We ring-fenced, as you said, the two subsidiaries of Lehman Brothers. There was a primary dealer and a non-bank finance company.

One other story that might be of interest is that senior management present said we must issue a statement saying that the RBI was aware of what was happening and was ready to take whatever action was necessary. As a novice governor, I said, “What's the need for such a statement? Because it's so obvious. It's like saying that every morning I get up and have breakfast. So do we say it?” And they said, “No, no, no, this is very important.”

I had enough intelligence to give in to their wisdom rather than resist it. But by 9:30 the following morning, when the markets opened, I realised the collective wisdom of the senior management of the RBI, because that statement had a remarkable calming effect.

Q: What was your approach during the so-called Taper Tantrums?

A: Between May and September 2013, during the taper tantrums, the rupee crashed by about 20% peak to trough. And we were one of the fragile five countries. 

Managing the taper tantrums was quite different from managing the global financial crisis in many important ways. 

First of all, when you're managing inflation, you have time to consult. But when it's an exchange rate crisis, you're denied that time because it's happening in real time. 

The second thing was managing expectations, and managing expectations about the exchange rate can be quite difficult. It is a different sort of animal.

And the third reason it was a bigger challenge was that the exchange rate crisis came at a time when the macroeconomic situation was quite vulnerable. We had a high current account deficit, a high fiscal deficit, and we were one of the fragile five. 

Q: Was this a kind of experimental time for you to use your communication and delegation skills?

A: First, a lot of credit for bringing the crisis to an end goes to Governor Raghuram Rajan. There was a change in leadership, and he brought confidence.
During my tenure, we had taken a number of measures — capital controls, intervention in the market, macro-prudential measures, restrictions on banks. The government raised customs duties. I also invoked what I called the “brahmastra”, the interest rate, for exchange rate defence.

But some measures were completed under Dr Rajan’s leadership, and credit must go to him.
Now, on communication.

Communication emerged as an effective policy tool during the global financial crisis.

If you go back to 2008, the Federal Reserve implemented unconventional measures, including quantitative easing. But each time, it accompanied those actions with forward guidance — that monetary accommodation would persist for an extended period.

Markets were reassured not only by the actions but by the assurance of continued accommodation.

Similarly, during the Eurozone sovereign debt crisis, when ECB President Mario Draghi said, “Whatever it takes to save the euro,” those words had a greater impact than many summits and declarations.

Communication became an effective policy tool.

But communication can also land you in trouble.

During the taper tantrums, when the rupee continued to weaken, we raised the policy rate by 100 basis points explicitly to stabilise the rupee. Most central banks do not openly admit to using monetary policy for exchange rate defence. We did.

The next morning, at the press conference, the first question was about the impact of tightening on growth.

I said we were aware of growth concerns but had acted to stabilise the rupee, and that we would withdraw tightening when appropriate.

Within half an hour, the market fell 5%.

Later, colleagues told me two things.

First, markets wanted to hear that the RBI’s undivided attention was on the rupee — nothing else. Instead, I appeared to be balancing growth, inflation and exchange rate concerns.

Second, my body language conveyed apprehension.

Someone wrote that the Governor was not an “alpha male”.

That was my lesson in communication. Markets react in ways you cannot fully predict.

Q: During your tenure, communication felt far more structured. Was that conscious?

A: That is your comment.

I did not consciously design it that way. But I believed that the RBI should be more open. It should listen to markets and market participants — and in fact to all stakeholders, even ordinary citizens.

We may not always respond. We may sometimes simply listen. But listening gives us information, knowledge and even wisdom.

Everything the RBI does ultimately boils down to managing expectations. Knowing the expectations of markets is very important.

Speaking to market participants is not only a way of gathering information, it is also a way of managing expectations.

So I believed in that approach, and I encouraged the senior management to follow it as well.

Q: Could you comment on how monetary policy worked under your leadership?

A: Rakesh Mohan was there for the first year. Urijit Patel was there for the last six months. For about three and a half years, Subir Gokarn was the Deputy Governor in charge of monetary policy.

There was considerable concern about why inflation was so stubborn and persistent, and why it was not coming down.

The markets — and by that I mean commentators and analysts — criticised us for not tightening rapidly enough.

In my book, I explained why we did not tighten sooner.

First, we were wrong-footed by data. The data initially showed lower growth than what later revisions revealed. We were worried about growth.

Second, the Eurozone sovereign debt crisis was unfolding. The European Central Bank had raised interest rates and then had to claw back. There was significant uncertainty in global markets.

We did not want to take two steps forward and one step back.

People often criticise in hindsight without appreciating the circumstances under which decisions were made.

I am not offering a defence. I am simply saying that context matters.

Q: Your differences with the Ministry of Finance. You had come from the North Block. How did that tension play out?

A: I would have answered this question more comfortably perhaps a year ago, before President Trump began openly criticising the Federal Reserve.

Political criticism of central banks has become more normalised globally.

In India, too, I had differences with the Ministry of Finance.

P. Chidambaram once told me, after I became Governor, that those who move from North Block to Mint Street become hostages to the technocracy of the RBI.

But the broader issue is institutional.

Across the world, tensions arise because central banks are tasked with maintaining price stability and financial stability. That requires making difficult decisions with a long-term perspective.

Elected politicians operate within electoral cycles. Their horizons are shorter.

That is the rationale for having a central bank at arm’s length from government — with instrument independence, though not mandate independence.

During my tenure, inflation was stubbornly high. The RBI needed to maintain a tight stance longer than politicians preferred.

At the same time, during UPA-II, there were concerns about growth slowdown and policy paralysis.

There was political pressure for lower rates. The RBI believed we needed to maintain tight policy.

That difference in perspective sometimes surfaced publicly.

Q: You have written about whether India has shifted to a structurally higher growth trajectory. Do you believe that is the case?

A: If you look around the world, much of it is reeling under geopolitical and economic uncertainty.

India appears resilient. Growth is above 7%. Inflation is benign. The external deficit is modest. Bank and corporate balance sheets are healthy.

It appears like a Goldilocks situation.

Historically, India oscillated between rapid expansion followed by instability, or stability accompanied by modest growth.

Part of the current resilience reflects structural reforms. The inflation targeting framework has brought transparency and predictability. Fiscal consolidation at the Centre has improved credibility. We are less dependent on foreign resources than before.

But if you look beneath the numbers, there is cause for unease.

Over the past forty years, we have rarely sustained growth above 8% for more than two consecutive years.

More importantly, what is this growth generating?

Only about 23% to 24% of the workforce is formally employed. The majority remains in informal employment, with irregular incomes.

Consumption is tracking below headline GDP numbers.

Lower consumption means lower demand. Lower demand means weaker private investment.

Instead of entering a virtuous cycle of growth and stability, are we entering a vicious cycle of jobless growth?

Jobs must come from manufacturing and exports. Manufacturing is not expanding sufficiently. Exports are not accelerating strongly.

So while it is plausible that we have shifted to a higher growth trajectory, we cannot confirm it yet.

Q: Having leapfrogged the industrial growth stage with 60% of our GDP now coming from the services sector, employment is going to be a challenge. We shouldn't lose out on the demographic dividend as we go forward. So that's interesting.

A: Right. In fact, you remember that once our textbooks told us that economies move from primary agriculture to secondary manufacturing to tertiary. We used to take pride in the fact that India leapfrogged over the secondary sector, went directly from agriculture to services. Now that's actually caught up with us. We now realise that we cannot accelerate and sustain a high growth rate unless we jack up manufacturing.

Q: On inflation targeting — you were initially sceptical.

A: Inflation targeting became popular in the 1990s. Thirty to forty countries adopted it, and it delivered decades of price stability and steady growth.

Central bankers believed they had discovered the holy grail.

The global financial crisis dented that confidence.

One criticism was that a single-minded focus on inflation allowed financial imbalances to build.

When I became Governor, inflation targeting globally was under scrutiny.

In India, much of our inflation is supply-driven — food and oil shocks — where monetary policy is not the first line of defence.

There were also administered interest rates affecting transmission.

Those were my reservations.

Over time, some constraints eased. Inflation targeting has brought transparency and credibility.

I would call it a moderate success.

However, if another exchange rate crisis arises, would the RBI retain full flexibility to deploy monetary policy as it did during the taper tantrums?

That question remains untested.

Q: What is your view on fiscal consolidation?

A: The finance minister has undertaken significant fiscal consolidation after COVID.

The fiscal deficit is 4.4% of GDP this year, and is budgeted at 4.3% next year.

More aggressive consolidation might have hurt growth.

I have no quarrel with the headline fiscal numbers.

My concern lies with expenditure composition.

Revenue expenditure remains high. Revenue deficits remain significant.

If interest payments and transfer payments consume a large share of expenditure, how do we sustainably reduce the debt-to-GDP ratio?

The challenge lies in expenditure restructuring