Duvvuri Subbarao is an Indian economist, central banker and civil servant. He is known to be a reformer at heart who has favoured inclusive economic policies. He was the 22nd governor of Reserve Bank of India (RBI), served under former prime minister Manmohan Singh. Subbarao, 69, said the government should choose a candidate as central bank governor who can command respect from the market.

He said the new governor will have the responsibility to restore the credibility of the central bank.

On the resignation of Urjit Patel, Subbarao said some surprise and some no surprise. "It looks like Patel seems to have been pushed beyond his level of comfort," he said.

A protracted battle between the government and the RBI climaxed on Monday when central bank governor Urjit Patel resigned, days before a board meeting where he would have faced intense pressure.

According to him, the government would need to do some serious introspection on Patel’s resignation.

Watch the full video here.

Edited Excerpts:

Wanted your first reaction when you heard the news, the event is destabilising, what do you think?

My first reaction was of some surprise and some no surprise. No surprise because for over the last two months, the possibility of Patel resigning has been in the realm of speculation. However, I was also surprised because there was an impression that after the November 19 meeting, the government under RBI had resolved the outstanding issues but evidently Patel seems to have been pushed beyond his level of comfort and there comes the resignation.

We are still in the realm of speculation but the understanding is that at the upcoming December 14 meeting the board was to get extraordinary powers over all actions of the RBI. Do you think this would have been beyond, as you call the realm of comfort as any RBI governor?

Absolutely, because the structure of the RBI board won't allow taking decisions on policy issues. There are, of course, eminent people on the board, people of exceptional quality and caliber who can advise the governor and the management of the RBI. But the board can only take decisions on administrative and managerial issues and advise the governor and the management of RBI on policy issues.

If the policy issues have to be taken in a committee or in a board, the board has to be structured differently. It has to have people with no conflict of interest and more so they have to be fulltime directors on the board and not people who are part-time like this.

But now when the government looks for a new governor, if this is the service conditions that the board will closely supervise and it cannot be changed unless perhaps the law is re-written or different conventions are set, if these are the service conditions, do you think it will deter the next candidate?

I don’t want to pre-judge or second-guess anything but there cannot be the presumption that the government will not introspect and will not take a lesson from this. I am sure that the government has the maturity experience, they will introspect on Patel’s resignation and also perhaps examine in what way they will have to push their agenda.

Push is a wrong word but in what way they will pursue their agenda, to what limits they can push it and at what point in time they have to withdraw. So the government will have to do some deliberate, serious introspection in this. So given that, the government will do that, the next incumbent governor - she or he - will, of course, have the task of restoring the credibility of the RBI and entering into a working arrangement with the government, which does not give the impression of being influenced beyond acceptable levels by the government.

Many experts did tell us that much of the market and the economy’s reaction will depend on the personality of the next governor. We have had two academics from outside the government system with Urjit Patel and Raghuram Rajan, before that we had people from the civil service. Who do you think is the best incumbent now?

I cannot speculate on either specific names or specific categories that the governor should be from, but I want to say just that there is an enormous amount of talent in the country, I can speak of at least a dozen candidates who would credibly fit the bill of the governor. I think the government should draw up a long list, narrow down to shorter list and choose the candidate who will command the credibility of the market, who is known for professional competence and for the maturity of handling the relationship with the government.

All former governors have had a doctoral degree in economics in the recent past and if I go as far back as Rangarajan. Do you think that would be important, a qualification in economics or finance?

Not that the qualification in economics or a doctorate in economics is an essential or even a necessary condition or qualification for the governor. He should, of course, have professional competence in economics and should have the intelligence to appreciate economic advice given to him and make a judgement.

For example, when Christine Lagarde came in as the MD of International Monetary Fund (IMF) a lot of people said that she is a lawyer and will not be able to perform, but over the last 7-8 years she demonstrated that even a non-economists can do very well as the MD of the IMF. Therefore, I believe that a non-economist can do very well even as the governor of the RBI.

You were speaking about the government being able to pursue its agenda with the next incumbent and at the same time give him independence. Do you think the RBI pursued its agenda a bit too much without giving the government its space or do you think the RBI was not allowed to do its legitimate agenda of maybe cleaning up banks or restraining NBFCs?

That’s a loaded question because all the information I have is what is in the public media. I do not have any inside information.

This is nevertheless a very difficult situation for the government and for the RBI, on the one hand, the bank clean-up is not over, on the other the debt market still have a problem and yet it is a hard fought autonomy of the central bank and that perception or credibility should not be lost. What is the best way out?

The best way out is for the next governor to establish credibility, perform in such a way that there is absolutely no scope for any doubt that he is not acting independently, the market should be convinced that he is acting independently.

On the government side, there is much more work to be done or homework to be done on the government side. they must – as I said earlier – introspect on what has happened and the circumstances and developments over the last two months that are culminated in Patel’s resignation and in what way they must change their stance, will they continue to aggressively or assert their agenda and pursue it or will they take a lesson from this experience and modify the stance and learn to defer the RBI.

All the concerns or all the issues that the centre has raised with the RBI are legitimate concerns of the government, nobody can say that it should not have raised them. But there are concerns about how the government has raised them, to what extent they have pushed them and to what extent they were going to push further beyond the comfort level of the RBI and of the governor.

We did speak about the board getting too many supervisory powers over the governor and that could have been the last straw but a previous issue that appears to have riled the RBI - at least from the outside it appears - is that one of the appointments to the board was clearly a political appointment in the sense Gurumurthy is seen very close to the ruling party, do you think that was a seminal error and the government should retrace such steps?

I should not comment on that because I have no exposure to what has happened inside the board meeting. There has been a lot of speculation about how a specific director, how he or she interacted in the board meeting but it is unfair for me to comment on that but I think the government should in appointing directors to the board, should choose people for their professional competence, for maturity and for how they project the larger public purpose within the RBI. I wouldn’t say that a person with political leaning should not be appointed but that person should not be allowed to bring those political leanings on to the board meeting.

It is a breaking of precedent isn’t it, can you remember any such politically inclined appointees?

I can’t say that, earlier I believe some people who were ministers in some state cabinets etc... but I think they were chosen for their larger understanding of the ground level situation. I don’t think they brought the political agenda or specific political lineage into the board’s discussions.

That is anyway in the past. Now for the future what is the best way to go forward? Normally, Reserve Bank governors are not chosen by search committees. It is usually between the prime minster and the finance minister, it is a very high level decision, but under the circumstances do you think a high level search committee of maybe former governors or much respected eminent men would be a good idea? We must also remember that this government has another 4-5 months and thereafter there is an election. It is possible that the same government comes back, it is possible that it comes back with a coalition or another coalition comes. So do you think this particular appointment should be made differently, do you need an interim governor what should be the best course?

I don’t know about the optics of selection of the next governor but as far as the actual selection goes whether it is a committee or whether it is a finance minister or the Prime Minister, we have to remember that whoever is appointed as the governor he or she will be a known, not as if they are going to bring somebody who is totally unknown, person both for his or her professional competence as well as for maturity and for experience. So, I don’t think a committee is in absolute necessity, they can of course consult people and select them, as I said earlier make a long list and then bring it down to a short list.

What is the one lesson from the rather unfortunate event of the governor’s resignation?

You are putting me on the spot, but I would say that there is a bigger lesson for the government about taking stock of what has happened and again I have to repeat what I said earlier, as much as they have pursued the right issues perhaps they should check whether they have pursued them in the right way and to the right limit. I think the government has to identify that point.

You move in international fora, what will the international fora take from this? Has the government and Reserve Bank suffered a blow for its credibility or do you think it can be quickly restored?

I don’t know if you want to say a blow, but there certainly will be a question about the government’s respect for institution such as the Reserve Bank, regulators etc. and markets will want to see whether going forward the government will take corrective action in terms of its interactions with the regulators and to what extent they will pursue their agenda.