In his first monetary policy statement as Governor of the Reserve Bank of India last Friday, Duvvuri Subbarao touched upon an issue that may have been bothering him for some time.
That issue pertained to the perception that he may not be as independent an RBI Governor as his predecessor, Y V Reddy, was.
Mint Road watchers, used to Reddy's style of functioning for five long years, see in Subbarao a man who will not toe a completely independent line on monetary policy and instead may just be doing all that the finance ministry is comfortable with.
That, however, is not Subbarao's fault. Anyone who comes to RBI after a stint in North Block is likely to face such a problem.
Subbarao, too, was the finance secretary before he became RBI Governor in the first week of September. He worked closely with Finance Minister P. Chidambaram. The perception that he may be influenced by North Block's concerns and considerations is only expected to gain strength in such a situation.
In recent years, R N Malhotra and S Venkitaramanan, who became RBI Governor in the early 1990s immediately after a stint in North Block, also faced a similar perception problem. Subbarao's problem is of course bigger.
Unlike Malhotra and Venkitaramanan, Subbarao has to contend with the formidable reputation of Reddy, who had established through his policies that he was a governor who would do things his way.
So, what did Subbarao say in his policy statement? While referring to the issues that the management of the global financial crisis highlighted, Subbarao said that there was now need for 'close coordination between the government and the regulatory agencies without at the same time eroding institutional integrity and independence.'
The RBI Governor noted that India had well-functioning institutional arrangements, which had stood the test of time. But there was need to 'constantly endeavour to build on these arrangements to further refine and strengthen them', he added.
What Subbarao said in his policy statement is actually an indication of the kind of relations North Block will now have not only with the central bank but also with other financial sector regulators.
There must be a sense of relief in North Block that the RBI Governor has acknowledged the need for close coordination between the government and the regulatory agencies.
The moot point, of course, is how such coordination will be achieved without undermining institutional integrity and independence. And how the new RBI Governor will like to build on these arrangements to refine and strengthen them.
Government officials admit that the problem might arise from any such exercise to put in place a formal mechanism to ensure coordination between the government and the regulatory agencies.
A formal mechanism, mind you, will have to ensure that the regulatory institutions' integrity and independence are not compromised.
The question being asked by these officials is that formalising such an arrangement may not solve any problem. Instead, it might stir up fresh controversies.
In fact, many of them even point out that the close government-regulators coordination that the RBI Governor talked about does not really exist.
At present, it is a one-way street where North Block is largely seen as advising other regulatory bodies on what kind of policy interventions they need to make. And the coordination at best is informal.
So, what the RBI Governor stated in his policy statement may well be an indication that he wants to break free from the current informal interaction with the government that is passed off as coordination between the government and regulatory agencies.
In his own words, such coordination must be achieved without undermining institutional integrity and independence. If those conditions have to be fulfilled, government officials fear, a stalemate is certain to arise.
The current system of government-institutions coordination has worked primarily because it has remained largely informal. Problems may arise the day attempts are made to make this arrangement a more refined and stronger mechanism without compromising on institutional independence.
Subbarao will like to be in the driver's seat as far as taking monetary policy measures is concerned. His statement on the need for strengthening the existing arrangements for coordination is an indication of that desire.