How Money Is Printed The Rupee Crisis Inflation And Power Of Rbi Ft Dr D Subbarao Ex Rbi Gov

How Money Is Printed, The Rupee Crisis, Inflation & Power of RBI Ft. Dr. D. Subbarao (Ex RBI Gov.)

Ravi Kapoor, IRS

June 29, 2026

How independent is the RBI railing from the governor? Is the prime minister ultimately the head of everything?

That’s not acceptable. No. If the prime minister does that, the Reserve Bank of India will collapse. Demonetization. You think it was a good move or not? 500 rupee and 1,000 rupee currency notes will no longer be legal tender. You can criticize demonetization hastily done, not thought through. The aims were not clear. They were not indicated by saying that tensions between central banks and governments are not uncommon. They’re there in advanced economy. They there in emerging economy. They’re there in developing economies. But how they managed makes a difference. Growth and stability is remarkable for India. I believe that there is lots of concerns about the economy. So the benefits of growth are not going to the low-inccome segments. Tackling unemployment is a very complex problem. My concern is that we are not even talking about it as a problem as a challenge that needs to be tackled. Dr. Subarrower, welcome to the show. I just wanted to say again that it is a rare privilege to be doing this with you. Thank you so much for not only spending time with me, for talking to me, for allowing me to do this because we when we spoke before I made a I made an explicit request and my request for you from you was to teach teach us I know that with your illustrious career the career and your career have been very illustrious you were the secretary to the prime minister’s economic advisory council of course you were the 22nd governor of the reserve bank of India you were the financial secretary of the government of India. You’ve written books a few uh two of which I have here with me both of which I honestly attempted to read but it was with the posity of time at my end that I wasn’t able to go through them but I’m still halfway through one and uh I’m talking about the one where you encountered President Bush in the first chapter itself. So that is the type of career you’ve had. I just wanted to say that to bring our viewers up to speed with the context and the perspective about who is it that I am speaking with. So our conversations it could be an economically dense conversation. It could be a very verbose conversation but I wanted to deliberately simplify and you have very graciously agreed to allow me to be a student today and help me understand and help the viewers understand various things that they keep hearing about but don’t completely comprehend our viewers s they understand and they hear about the report they hear about the RBI being something very important with the government but they’re Not very sure I feel. What is it that the RBI does? What is it? Is it in your opinion, in your words, is it a bank’s bank? Is it the government’s bank? Is it the department of the government? How powerful is it? Such are my questions. Basic childlike almost and simple. So with that uh introduction I wanted to start off with a warm welcome asking you my first question which is what is the RBI? How would you describe it to a lay person? Thank you. Thank you Ravi. It’s my pleasure to be on this platform and to be talking to your viewers and that’s a good opening question to start with. What does the RBI do? Let me tell you my own experience. When I was the governor and I was traveling around the country in a car or whatever, I used to be very fond of stopping the car if I saw a roadside school, I just stop the car and walk into the school. I used to be very fond of doing that. And you know when uh three two three cars stop in front of a village school and suited booted men walk into a school uh there’s a mild panic a lot of uh you know what the headmaster and the teachers got flustered and I walk into a classroom and then within a half a minute to a minute they realize because somebody in my team whispers to the teacher that this guy is the I’d be a governor then you know faces light up and it’s very easy for teachers to introduce the RBI governor. No, they say you know who this guy is, this guy is the one who signs the currency notes and the children’s faces like that because very easy people understand that this guy signs the currency note. Imagine if the prime minister walked into a school and the teacher has to explain what the PM does. Very difficult for her to explain. But RPI governor very simple, the most simple job to explain to children in the country. He signs the notes and some little children would ask me sir why don’t you s learn to sign faster so that we have more money and slightly older children will ask me you know why don’t you why don’t you sign more so that we have more currency and we can become a rich country so what I’m trying to say is that most people associate the reserve bank of India with printing and distributing currency printing and distributing currency is of course an important part of what the RBI does but it does a lot of other things. It most importantly it does monetary policy which is to maintain price stability low and steady inflation. It maintains financial stability like for example you keep your money in the bank. You don’t worry if your money in the bank is safe or not because RBI is worrying about it. You payment and settlement system these days we do UPI transactions. who is guaranteeing that system that money goes from my account to your account. So RBI does a lot of things that make a difference to people’s everyday lives. So if you want if you want me to capture all that in one phrase, I would say that the responsibility or the job of RBI is to maintain stability, macroeconomic stability in the economy. by which I mean price stability, financial stability, exchange rate stability. So RPA’s job is to maintain financial stability and that makes a lot of difference to people’s everyday lives. It it certainly does sir and uh thank you so much for being so kind and so simple with your explanation. You have explained it to me in a very nice way and it makes a lot of sense. But so the first the more fundamental question I suppose that uh student a very young student might ask is uh this financial stability that we speak of to a lay person it translates to the money in my account or to the currency notes in my wallet. Now where does this money come from? I hear again I ask as a student that the US is able to print money that the RBI has the power to print it on on demand and I also understand as a slightly um as a slightly more advanced student that this is perhaps the reason for something called as the fiscal deficit that the government keeps on incurring. Is this a good habit? Are you able to print money on demand? What exactly is going on sir? Well uh there’s lots of questions. There are lots of economics in what you ask Ravi but let me take them one by one. Uh as I said RBI prints currency and RBI is the only institution authorized to print currency that is acceptable because if you see on the currency note you know you take a 100 rupee note and you’ll say that I promise to pay the bearer a sum of 100 rupees. Now if you’re actually having a 100 rupee note in your hand, what does the promise of a governor sitting in some office in Mumbai, what does it mean? I actually have a 100 rupees in my hand. What it means is that the governor is guaranteeing that this is accepted currency. Nobody can refuse to accept that currency. So RBI authorized to issue currency. Not all the currency is printed. Some of the currency goes in terms of resource etc. But that’s a a second layer of competition. We won’t get into it right now. But RBI is authorized to print currency that is has to be accepted by anyone. No one can refuse. Now how does RBI decide how much currency to print or how much money to create you know money more broadly? That depends as I said earlier on RBS mandate which is to maintain price stability and financial stability. So RBI modulates the amount of money it creates in order to maintain price stability and financial stability. And how does RBI create money? Like for example, you know, if I have to buy a bond in the market for 10,000 rupees, I actually have to earn 10,000 rupees. You know, I can’t just go and buy I need to have 10,000 rupees in order to buy a bond. Now RBI does not have to have 10,000 rupees. RBI can just print 10,000 rupees, pay that money and buy the bond. So that’s the difference between us and RBI which is that RBI is able to create money out of thin air. RBI is authorized to do it and RBI has to do it very responsibly. Uh sir I wanted to again ask another fundamental question because they all stem from each other and I suppose that is the beauty of economics or at least how I perceived it when I studied it to whatever limited exposure I have had with it. So you said that the RBI has is empowered to print money. You also said that it must do so responsibly. Now it is my understanding that the RBI gives a guarantee like you also mentioned which is written and explicitly stated on every currency note. I also understand that this guarantee is supposed to be backed by something. Yeah. And that there was a time when it was backed by gold. Right. which was the regime until it was changed during the presidency of Nixon in the United States. The gold standard as they say has had been had been then replaced and the rupee was decoupled uh the the dollar sorry was decoupled from that gold backing. So what how do I understand this? Is it okay for me to say and understand and to assume that if something goes off in the economy, I can take my 100 rupee notes and the RBI has a lot of gold in its coffers in its seller or in its secret bunker or wherever and I should be able to hold the RBI responsible to say that you gave me a guarantee. Now you you you back this piece of paper with the gold give me the golden return. I know that’s overly simplistic but if I am wrong where am I wrong? Uh that actually used to be the case earlier which is that the amount of currency a central bank created not currency but let me say that’s uh incorrect in a very strict term. the amount of money a central bank created, excuse me, had to be backed by gold or some asset of value. Okay. Now, uh that used to be the traditional central banking. In fact, if you if you go back before central banks, how did paper money originate? Paper money originated because they were merchants and they they used to go around the country and go around the world and trade and they need it. they couldn’t carry gold. In fact, you know, it’s very cumbersome to carry gold and trade. So, what happened was that they found a trusted party, a party everybody trusts. So, I go and put uh let’s say 100 grams of gold to the central trusted party, a village headman for example. The village headman gives me some tokens paper for worth 100 grams of gold and similarly 20 other merchants do that. So when we merchants trade among each other we trade in that token issued by the central counterparty on the understanding on the trust that if anyone ever went back to the central counterparty the will headman he would get back equivalent amount of gold. So money worked on trust and trust was backed by a person who commanded trust and that trust was backed by some precious commodity like gold. So that village headedman gradually morphed into a central bank. Central banks used to issue currency against gold and that used to be the case all through the 19th century and that ended not like you said with Nixon but actually after the great depression. Okay. When the Bank of England first went off the gold standard and several other central banks went off the gold standard, it not like they declared all of a sudden but gradually they said that we will issue money not necessarily against gold held by us. And that issuance of money central bank still commanded trust because number one that currency issued by them had to be accepted. Number two, it was that it would trust it. The central banks would not print too much money or too much create too much money that would depase it. So we had merchants and paper currency. Then central banks creating money against the gold standard. That gold standard has been broken off after the great depression. Today central banks issue money against it’s called fiat money not necessarily against any hard asset but as long as a central bank commands trust that works you know in some country they had 36,000 100,000% inflation in those countries that trust doesn’t work. The central bank has to perform in such a way that it continues to command trust so that there is price stability and financial stability in the in the in the economy. Ah again thank you so much sir again for saying that and for answering it so so nicely so beautifully and also allowing my questions to just stem from your answers which is I think one of the best ways to learn I suppose. Um sir, you mentioned something very interesting to me. You you spoke of inflation and then you gave me an example of how in some countries 100,000 percent inflation yeah percent inflation and then the the unit economics and the the currency value seems to have no value whatsoever and this is called I if I’m correct hyperinflation. You said that inflation is when in this case the trust doesn’t work. The trust doesn’t work. It was my understanding that inflation is when a lot of money is chasing goods that are too few, goods or services that are too few. It is also my understanding that inflation is a concern. It’s a perennial concern for the government and for the central bank. As an Indian today, if I want to understand what’s really going on, why is it that everything around me tends to keep on getting more expensive? How should I understand it and what is the role of the RBI in it? Yeah, when I said inflation is arising out of lack of trust, I think that connection is a bit fragile. What I intended to say actually was that when the central bank uh manages on its responsibility and creates too much money then there is too much money create chasing too many goods as you said and there’s hyperinflation. Okay. So the central bank has to retain trust by creating money commensurate with price stability and financial stability. There are several responsibilities for a central bank as we discussed earlier in this conversation. But the prime responsibility of a central bank [clears throat] any central bank in the world uh including the Reserve Bank of India is to maintain price stability which is low and steady inflation and low and steady inflation is important for a number of reasons. I can explain them later if you want but you have a central bank to ensure that there is low and steady inflation. In India, we’ve defined low and steady inflation as 4% inflation within a band of plus - 2% which is that if inflation is in the range of 2 to 6% it is uh low and steady inflation and as far as possible we want to be as close to 4% as possible. The responsibility of RBI is to deliver on that inflation target. And how the RBI does is by modulating the cost of money and the supply of money. There are two instruments available which is the price of money the most important price in the economy is the price of money which is the interest rate set by the RBI. So RBI uses the price of money interest rate as one instrument and the second is the volume of money amount of money that creates. Okay. So these two variables or toolkits available to RB the price of money and the volume of money RBA modulates them in order to deliver on its inflation target which is currently 4%. Right. Uh sir, you mentioned the price of money and the volume of money and these toolkits. Now coming to the governor himself, what exactly does he do or can he do to uh do all of this? Is is he the person who is taking the control and then notching it up or down himself? Is he doing that or what does he do throughout the day? What are the powers that he must exercise in order to deliver on these targets? Like you mentioned 2 to 6% is understood to be low and steady inflation. Yeah. Let’s you know part of let’s separate the two question the daily routine of the governor and what does the RBI governor do in order to manage or deliver on uh the inflation target. You know earlier in the conversation you said what does he [snorts] do? uh soon enough I hope we will be able to say what does she do because we’ve not had a woman governor hopefully soon enough we will have a woman governor but Dr. part you know uh about uh the we have a two monthly bimonthly meeting of the monetary policy committee you know last week there was one for example so the interest rate is set by the monetary policy committee of which the governor is the chair there are six other members and those members uh listen to a lot of analysis by the Reserve Bank of India staff they deliberate on the state of the economy, not just the Indian economy but the global economy. They look forward to what might happen in the next few weeks, few months indeed of the next few years and decide on the interest rate. Okay, what that the report rate what the report rate is will come to later. But the report rate at its most uh abstract determines the cost of money in the economy. So the MPC decides the reporting which in my time there was no MPC. I used to decide myself as the governor and then the Reserve Bank of India does liquidity management that is which I said uh the volume of money you know so the price of money volume of money. So liquidity management in order for that interest rate to prevail. Okay. So you see if uh if there is a money lender if there’s a money lender in a village and he says I’m going to lend money at 10% rate of interest and if nobody is borrowing money at 10% rate of interest it means that that 10% is not prevailing. So either has to reduce it rate of interest or there’s more demand for borrowing that that 10% prevails. Okay. Similarly, RBI monetary policy committee decides the reported which is the cost of money and the RBI does liquidity management on a regular or basis in order to make that interest rate prevail. Okay, that is the crux of monetary policy and the governor is involved at the policy level even at the operational level but not at the very nitty-gritty level. I understand. Uh sir, you mentioned the MPC And I understand that there is discussion about the MPC at the beginning of your book I think in the first few chapters where your conversation with Mr. PJ Amram yes was around that at the time of your appointment before the time of your appointment I suppose the interview as you as you quoted you called it the interview that you had it was all about the autonomy or the lack of it of the governor and to the extent to which the other members of the MPC can impinge or have their say carried out by the governor. So of course the the question in the mind of the lay man will be how independent is the RBI really from the governor? Is the prime minister ultimately the head of everything or is there real autonomy there? Well that is uh a trick question actually. Uh first of all uh let’s understand why a central bank has to be independent. Okay. So then we can uh talk about how independent the RBI is. We talked earlier about the responsibility of the RBI to deliver on low and steady inflation. Now that means controlling the price of money or the volume of money. Why indeed should you have a central bank to do that? Why can’t the government do it by itself? You know, government has enormous amount of competence. they can just you know hire more technocrats if necessary. Why don’t governments themselves don’t do it? Because this is a technical function that has to be done uh without political responsibility because deciding on the price of money and the volume of money means taking some decisions that might in the short term indeed even in the medium term inflict some pain on people. Now politicians will not be inclined to take decisions that inflict pain on people because ultimately they got they need people’s uh political uh approval. They want votes. So in a democracy indeed even if a government is not democratic uh they need people’s support. So they will they will be disinclined to take unpopular decisions. So you need a central bank which is a political takes a long-term view of the economy away from short-term political compulsions can take decisions that are good for the long-term sustainability of the economy even if they cause some pain in the short term. So that’s why across the world uh the people think the bank of England or the first central bank is actually the bank of Sweden uh the rich bank as it’s called that was that is the first central bank then the bank of England other central banks came around with this understanding that they will be run by technocrats appointed by the government but they will work independently of the government because if the government dictates everything the very rationale of having a central bank apart from the government fails. But you must also recognize that there is tension between the government and the central bank which is hardwired into this because the central bank is taking a long-term view making decisions that might in the short term cause pain but it believes that it’s good for the long-term growth and stability of the economy and the government which is called a short-term horizon is called horizon differences is uh irritated or unhappy with that. There’s some tension. As far as the RBI is concerned, I believe it is important for the RBI to listen to what the prime minister has to say. Listen to what the finance minister has to say. Listen to what indeed the government has to say because the government is an important very important stakeholder in the economy but ultimately decide uh by the MPC or decide by himself. Okay, that’s very important. So can the prime minister by dictat say that no you reduce the rate of interest by 50 basis points that’s not acceptable no if the prime minister does that the reserve bank of India will collapse I see sir uh have you had any experiences where you’ve had to hold your ground on certain areas where you felt that uh such a thing was perhaps expected and would not have been so healthy. If I may ask, first of all, let me tell you that this is not unique to India. Differences between government and central banks are across the world. We’re seeing this most prominently in the US today. Donald Trump every day running a tiade against the Federal Reserve demanding that they cut interest rates. So I want to preface my answer by saying that tensions between central banks and governments are not uncommon. They’re there in advanced economy. They there in emerging economy. They’re there in developing economies. But how they managed makes a difference. Take the Federal Reserve for example. The US situation federal the Trump is more valuable than previous presidents. Even previous presidents had expressed their uh dissatisfaction or irritation or anguish or anger at the Federal Reserve. But Trump does it more valuably because that’s his style. But what you notice there is that the American markets are not too perturbed. They’re they’re taking it in a stride because they know that the president had limited powers to influence the Federal Reserve. Uh he might express his opinion more valuably but ultimately when when push comes to show the Federal Reserve is independent institutions are strong. So for the central bank independence to be strong uh you need strong institutions and and a mother economy should be defined among other things by strong institutions. Now you asked about my experience. Yes, there certainly were differences especially at that time. Remember, throw your mind back to 2011, 12, 13. We were going through what is called stagflation or at least fear of stagflation. I don’t believe it was stackflation, but there was fear and anxiety about stackflation, which is high inflation and low growth rate. And at that time, you also remember there was something called policy paralysis because of the scandals that the UPA government was uh involved in. So the government could not do a lot of things. So there was a lot of pressure on the central bank to cut interest rates to stimulate the economy which I believe was fair for a political leader to do. But on the other hand in the Reserve Bank of India we thought that the case for cutting interest rates is not strong enough because inflation was still high. So there was the tension there was pressure on me uh both from uh both from both finance ministers at that time to cut our interest rates. Sir if I may ask if I may pro further only if you will allow me how is it that this pressure is applied. Exactly. How is it that the pressure is conveyed? You know uh uh in in our system the finance minister does not go and say I believe RBI should cut interest rates. It’s a good thing. Okay. Because our system is not strong enough to take that. So it’s a good thing that neither the PM nor the finance minister makes comments about RBA policy. I believe that’s a very mutual that’s a traditional mutual respect which must continue. But pressure comes you know you you go to brief the finance minister before the policy brief him or her on what you think is the economic outlook what you’re planning to do and why you’re planning to do that what outcomes it might result in the the finance minister might have a different uh different view and the finance minister says no I believe you must do is that can come as a mild suggestion that can come as strong suggestion that can come as pressure so that’s the way it operates and you know I should say in in favor of our institutions that as much as some others have spilled over they’ve never spilled over so much that they’ve disrupted the economy this is good to know sir it’s good to know I have One more fundamental question uh about these institutions as you have mentioned and then I wish to go on to the state of our economy today. The contemporary issues that we are facing or at least hearing about if not facing directly. So you have mentioned the RBI. We have spoken about the RBI. The role of the governor is of course at the center of our conversation. We have mentioned the finance minister. We have mentioned the prime minister. There are these three separate institutions. It appears to me the RBI, the finance ministry and the economic advisory council of the prime minister himself or herself. How do we distinguish between who’s doing what and exactly which body is it that is controlling much of what is happening downstream for the layman? You mean in the entire economy or just the uh Yes. See uh in the Yes. The economy is much broader. Okay. And the responsibility of managing the economy is on the government. Okay. Um because uh the government is responsible for economic management. The RBI within that broad mandate has some mandate for maintaining stability as I said no price stability uh financial stability and exchange rate stability. But and lot of people think that the RBI can generate growth just by controlling interest rate and money supply. Yes, RBI can control growth. For example, if they reduce interest rate, if they believe that the situation is good enough for reducing interest rate, that can stimulate the economy, stimulate demand and generate growth. But what should be understood is that the ability of the Reserve Bank of India or indeed any central bank to support growth is limited. Let me explain that. If for example the potential growth rate of the Indian economy today is 7.5%. And if the economy is only growing at 6.9%. There is a gap between what is the potential growth rate and what is the actual growth rate. The potential growth rate simply I mean very simple terms is the growth that can be generated with the available labor and capital and productivity in the economy without causing instability. So RBI through its monetary policy can to some extent raise the growth rate from 6.9% to 7.5%. Okay, that from its current level to the potential level but to raise the potential growth rate itself from 7.5% to 8% or 8.5% that is the job of the government. So the government has a much wider mandate which is uh fiscal policy which is uh development policy. So government has to do all of this uh in order to maintain a rapidly growing stable economy. So with that of course I would like to come to contemporary issues and of course the role of the government is so central to it because we hear not so good things about the valuation of the rupee. We hear that it is continuously weakening against the dollar and uh this is something which affects the average Indian because the value of the money or the wealth that we have is depreciating frankly speaking without any fault of mind. If I represent the the afflicted party here, the afflicted party here, what is going on sir? How how is the economy doing? How do you see the value of the rupee as it is going down with the dollar? What is it that you can educate us about or give us perspective on an entire one semester course? Okay. And I’m not sure I can handle that either of course or explain this in two three minutes. But one thing I want to say is that as much as depreciation of the currency causes pain to most people uh but sometime depreciation might be necessary might be inevitable unavoidable. Let’s come to that. But first of all we should understand that the exchange rate is a price. a price in the economy. Just as we have price of potatoes, price of a bottle of shampoo, exchange rate is a price. Price of a dollar in rupees is the exchange rate and exchange rate matters because that determines our uh uh relationship with the rest of the world and how we can improve our economic prospects. We serve with the rest of the world. exchange rate matters. But to believe that exchange rate depreciating is uh an erosion of national honor or an erosion of national pride or indeed weakening of the economy is not correct because the exchange rate like any other price that presents demand and supply. When the demand for dollars is very high, the exchange rate depreciates. So we must learn to look upon this not as a matter of honor but as a price in the economy and just as prices should be stable the exchange rate should also be stable. Okay. Today the exchange rate is falling for a number of reasons. Uh we can get into them but I want you to understand that exchange rate is a price in the economy and if it falls it is a response to supply and demand. It is not necessarily uh a bad thing if it is adjusting you know to this because sometimes when the exchange rate is under pressure to fall and to prevent its fall it costs money. So uh people think that why does why doesn’t the RBI just prevent the fall of the rupee by no selling dollars because there’s a cost to it and if the exchange rate ultimately has to fall it is better to make let it fall rather than to stop it from falling because if you stop it it’s going to be a futile and costly battle eventually you can’t you can’t stop it. So exchange rate should be allowed to track fundamentals and if the fundamentals of demand and supply are saying that the exchange rate should fall we should allow it to fall. What the RBI should guard against is to manage the trajectory of the fall which is that there is no volatility but exchange rate adjusts to the new level in a smooth trajectory that is the responsibility of the bank of India. Uh sir I again uh want to ask a few fundamental questions on this. I know that this is probably worthy of uh many books and uh an entire course of an entire semester I suppose. But then uh is it not true sir that there are three types of exchange rates with we the relationship of the central bank to those exchange rates. There is a fixed exchange rate there is a free exchange rate and there is a managed float. Now in India we have a managed exchange rate and so the RBI can allow it to fall but they can interview but they can intervene as well. I believe that China has a fixed exchange rate and so is it true to say and is it correct for me to understand that they that we could have evaded the problem had we why why do we have a managed exchange rate at all? Why why not have a fixed one? And they seem to be doing just fine. We used to have a fixed exchange rate before 1991 and we got a lot of problems because of that. So an exchange a fixed exchange rate is certainly uh you know some people still think it’s good. The China fixes it exchange rate manages exchange rate more aggressively uh than most other countries. But a fixed exchange rate can cause enormous amount of problems. Like for example, you can have balance of payments crisis which is that if you have a fixed exchange rate, you may not have enough money to buy all the reserves, all the things that you want from the rest of the world. So a fixed exchange rate can cause a lot of problems just as you know let’s say we’ve experienced this also you know some state governments earlier used to say that price of idlies must be you know no more than 20 rupees some in some southern states governments fixed price of idli etc. It never worked because if you fix a price of idli at 20 rupees a black market develops but the 20 rupee idli you get is uh just water uh whereas there’s a black market where you get uh higher quality so similarly controlling prices is not a good thing because a black market develops lot of other things happen as a consequence in particular if you fix an exchange rate you will have capital for problems and you will have control. You will lose control over inflation. Okay? There’s something called the impossible trinity. I don’t want to get into all that. But if you have a fixed exchange rate, you will lose control over inflation. You’ll lose control over capital flows coming in. You may not get enough capital. You may not get enough money to buy. So, experience has shown that a fixed exchange rate in today’s world is not a good thing. If you want to trade with the world, if you want to benefit from foreign investment, foreign trade, you should have a flexible exchange rate. Sir, you mentioned the impossible trinity and uh I know this is not the most basic question to ask, but I wish I would love to delve deeper because when when else am I going to get this opportunity? Uh sir, I I suppose you are of course referring to the Mandel Fleming tram. I came across this a few days ago. I was reading about it and uh it it does seem to claim that you can’t have all three. You can have two out of three if a central bank can’t manage exchange rate, own domestic policy and capital inflows. Understandable. But China seems to be doing just fine. That was my question when I heard about the dilemma. Is that not a valid argument? And do those assumptions hold? They do because what China does we cannot do. Okay. There’s a lot of financial repression in China which we are not aware of. Okay. So, China is growing at you know has grown at 10% plus for over three decades. But the benefits of growth have not been widely dispersed. So, uh China can mandate a lot of things because it is not a democratic regime. Uh it can repress people uh which we cannot. So I believe that trying to replicate a China model is difficult in a vibrant vigorous democracy like ours. And I don’t believe we should want to copy China. We should be as far as possible a free market economy. Of course there should be some controls. We need have some trade controls. We have some capital controls. We have some exchange rate controls uh which the government and the RBI determine. But I believe the economy is best served by being open uh to the world not controlling too many things because a controlliced economy is kills growth generates instability generates black market in in fact generates crime as a consequence. So I don’t believe that’s the way we want to go. We learned this lesson very very hard before 1991. So we should not repeat that. Sir, I want to come back to circle back to crime. I want to come to black money and uh if I can also ask you about what you thought about demonetization and I hear some news. I hear I hear rumors not news about the government reducing plastic currency and so on and so forth making it making the current uh notes in circulation redundant should that happen. But sir before I do that before I do that I want to understand something. You mentioned that we should have a free economy rather than a controlled one and we should let the fundamentals drive these numbers numbers like the exchange rate. Now, is it not right for me to assume that it is the consequence of precisely that that we are held hostage by the dollar to an extent to to uh the extent that we have no choice like you mentioned that in order to ma maintain the exchange rate or to support the rupee we have to deplete foreign exchange reserves. It’s a dollar that keeps getting more and more scarce. So is it not true to is it not okay to think like this? And if so then how can I correct my thinking? See you don’t know the counterfactual, right? You don’t have the counterfactual if we actually held a fixed exchange rate controlled capital coming in. We did not trade. We did we rest putting restrictions on imports. So let’s say in short we went back to the pre 1999 regime. You do not know what cost there would have been. There would have been black market. There would have been inflation. We would have been a highly indebted country. So we would not be able to export. We would not have enough money to import what we want. So by talking about you know reimposing some of the controls, we should also think in terms of what cost you to pay in order to get back controls. And as I say not just India’s experience but experience around the world is that loosening controls is a good thing for the economy but do it in a calibrated regulated manner. Uh you know I I I call it the fistina lente which is [snorts] lackin for making haste slowly do make haste but do it slowly so that it is commensurate with the needs of your economy. So I don’t once again I want to say that that believing that all our problems are because of a flexible exchange rate and going back to a fixed exchange rate is forgetting all the problems that a fixed exchange rate can cause. Uh sir, I want to ask something which is which I know that that you will preface with uh something but that it’s the preface that I was that I’m hoping for. I feel as a lay person and I read the news and I look at Donald Trump and I see what’s happening to our economy and I tend to walk away with a feeling which I do not like is that we seem to be held hostage by the dollar. Is my thinking correct? If not, then how do I correct it? See, in some sense, we are hostage to the dollar, as indeed the whole world is, [snorts] including China, for example. There’s no country that is not in some sense hostage to the dollar because the dollar is the world’s dominant reserve currency. Uh let me let me explain what that is. Just as we use rupees in the Indian economy, [snorts] if I want to buy something, I use rupees. If I want to make a deposit of five lakh rupees, it is a deposit of five lakh rupees, right? Uh it is uh uh if if I want to buy rice, you know, it’s rice is priced in rupees, 42 rupees per kg. Okay? So money is a unit of account, a medium of exchange, a store of value. Just as we use rupee for all these needs in the domestic economy, internationally countries used the dollar. Now it is not as if the dollar has been anointed as the dominant reserve currency. The dollar is the world’s dominant reserve currency today because of the strength of the American economy, the depth and liquidity of the financial markets, American financial markets and the resilience of American institutions of government that we talked about earlier. So if America fails in this regard, certainly the dollar will erode and there are indications that the uh the dollar’s uh control is eroded. Uh okay, but it is still by far the dominant reserve currency. It’s not as as if it’s been anointed. So what does it mean? It means that if I want to trade, trade is invoiced in dollars. It’s settled in dollars. If I want to make an international deposit, let’s say I want to send 100,000, I want to deposit, let’s say, in a Japanese bank, I’m going to send them dollars, for example. So, uh, if I want to buy a book, import a book, it’s priced in dollars, $17.95. So, unit of account, medium of exchange, store of value, a dollar is serving that purpose. And the there is resentment against the dollar for the reason that America is weaponizing the dollar. For example, they’ve imposed sanctions on Venezuela, on Cuba and Iran, Iraq, Russia, uh North Korea. Some of these sanctions may be understandable but the reason is that there is worry that with this worry that America might start acting capriciously and impose sanctions on any regime it doesn’t like. So that’s one reason for resentment the weaponization of the dollar. The other is the instability it causes. You know, if you look at every financial crisis over the last 30 years, every financial crisis in an emerging economy, it’s been caused because of dollar inflows and dollar outflows. So the dollar has been a cause for instability in the world economy. And because the dollar is the world’s reserve currency, America is able to borrow very cheaply in the market. For example, if you have $100 in your pocket, you are actually giving an interestfree loan of $100 to America. And if a billion people around the world keep $100 in their pocket, that’s $100 billion of interest free loan to America, which is as one French president called exorbitant privilege of America. And that exorbitant privilege is being paid for by all of us. Okay. So for all the reasons there is resentment against the dollar as I said there is no there’s no international pact anointing the dollar as the reserve currency. So the dollar will go if there’s a rival and the dollar is surviving because there is no rival. So you’re right that in some sense we are hostage to the dollar just like every other country in the world is but that’s a price we have to pay for being part of the international system. said like you mentioned us being hostage. I mentioned it and then you you explained it to me and Yeah. Yeah. And and it appears but we are also hostage to corruption. We are also hostage to black money. It afflicts the economy and uh there have been attempts demonetization being one very large one. I want to ask if I can whether you think it was a good move or not. In hindsight, do you think it worked? And then of course I want to ask if there is any truth to the rumors I hear about there being a plastic currency. And if if yes, then why would the RBI do such a thing? Why would the government do such a thing if at all? If I can ask these questions. They are speculative admittedly. Yeah, it’s uh interesting that you revive demonetization because it happened 10 years ago. Uh it’s in the distant now in the distant past. Uh when the demonetization happened, I answered this question several times. Uh you can criticize demonetization because it is uh hastily done, not thought through. Uh the aims were not clear, they were not indicated. Of course, an element of surprise was necessary. But once demonetization had been uh announced and implemented, it was incumbent on the government to say why they were doing it, what outcomes they were expecting and after the demonetization episode was over, whether the outcomes matched the the realist outcomes matched the expected outcomes. That was not done. So you could criticize demonetization for the way it was implemented for uh the government’s uh reluctance to compare expected unrealized outcomes. But demonetization itself had some you know in theory it has some ration. It was done in the past to weed out black money. Black black black money accumulates. uh we do not know how much black money was actually unearthed because amount of money that came to the Reserve Bank of India was more than the currency. So in some sense it is it’s an enigma. It remains an enigma. It’s a question that we buried but it still needs to be explained. How come uh the money that came back to the South Bank of India was more than the uh than the currency in circulation as per our accounts. Okay. But at this distance of time, 10 years from now, how do I view demonetization? I would believe that apart from all the pain we’ve gone through, all the pain the economy has gone through on all the expected outcomes that may or may not have come. One thing we must judge the demonetization by is whether the incidence of black money has gone down and whether tax compliance has gone up. Okay. Now there have been no studies but today excuse me the tax GDP ratio has certainly gone up from what it was in 2016 to 2026. How much of it is due to demonetization and the fear of uh uh getting caught if there is no tax complaints? How much of it is due to other factors? We do not know because tax GDP ratio could also have gone up because of digital technologies, digital visance. So we need to do a study on that. So that’s my long- winded response to your question on demonetization. To summarize, looking back, we must evaluate demonetization by whether number one, it’s curved black money. Number two, it’s improved tax GDP ratio. We need further studies on that. Now, you raised the issue of plastic currency. I want to distribute this notion that plastic currency is in some sense linked to demonetization. Certainly not. Okay. Certainly not. They’re two separate things. There’s several countries in the world which have plastic currency. Singapore for example, Australia, okay, they have plastic currency. And the reason you have plastic currency is for durability, uh prevent counterfeiting, whatever. In fact, it’s an idea that goes back to my tenure as governor. Indeed even before me uh we wanted to have plastic currency and uh there was some reluctance or some studies showed that there may not be acceptance for [snorts] plastic currency in India because people like the feel of money but now I believe it’s a good time because currency is actually going down in use we using up etc. So plastic currency is a good thing to have because it is more hygienic uh and it’s more durable. So first thing I want to say delink introduction of plastic currency from any sense of demonetization and second plastic currency is the way forward. Understood. Uh sir I want to come to the state of the current economy and the way you see it because it’s very hard to understand what the economy is because of course it is a very nuanced abstract notion we do not understand how to even view it which is why there are all these numbers there’s the GDP there is the GMPP there is inflation there is tax GDP ratio there is the balance of payments there is the evaluation of the rupee then there is what the markets are doing and one only can gauge only only so much after taking in absorbing all these indicators which is at best is what they are how do you see the economy sir if you to explain to a lay man how is it that the Indian economy is doing today? How would you see it? That again is uh an entire semester course and perhaps somewhat contentious because u some [clears throat] people some political leaders say that the economy you know especially the ruling NDA would say that the economy is doing very well. We saw two days ago Prime Minister Modi is 12 years uh in office celebration where his uh one of his prime achievements was actually to pull the economy together put it on a firm growth path with stability and then there’s the opposition which says that uh for all the macro numbers uh they there’s a lot of distress in the economy. So if you give me 3 minutes I will give you my own assessment of the economy. uh you know if you take the last four five years we’ve had rapid growth and uh fairly benign inflation and but for uh uh the episode or developments after the Iran crisis uh fairly stable external sector even at the rupee has been going on capital account has been a matter of concern but external sector was quite secure current account deficit was within safe limits so if you look at the macro numbers growth inflation benign current econ deficit within sustainable limits. Bank and balance sheet, bank and corporate balance sheets healthy. Uh we were a stable fast growing economy you know fifth largest economy or whatever fastest growing large economy etc. And this is unusual for India growth with stability because if you go back the last 30 years we had periods of rapid growth but that hit against the walls of instability. For example 2004 to 14 we had relatively rapid growth but we had inflation and we had uh external sector problems current deficit. 2014 to 24 we had stability but less rapid growth. So uh growth with stability is remarkable for India. Now is this the real thing? Is this the goldilock situation? I believe that there is lots of concerns about the economy. Uh the prime concern is private investment. So uh the the problems with the economy uh if the first problem is private investment ultimately economies are driven by private investment you know we grow we get growth from consumption investment uh and net exports. Okay. uh but in the in the case of uh no our uh over the last four five years the economy is being driven by government investment not so much private investment but there are limits to how much the government can invest because there are fiscal deficit constraints there limits to how much the government can borrow and spend even if it is on durable goods on capital goods so private investment is to take off. Why is private investment not happening? And my explanation for that is that private investment is not taking off because there’s no demand. And why is there no demand? There’s no demand because even as the economy is growing, the benefits of the economy are not growing to the low income segments. The benefits of economy are going to the upper income segments. You know you and I are in some sense in the upper income segments of the economy. So if my income if it’s let’s say it’s 1 lakh rupees per month if my income goes up by 10% 10,000 rupees per month I’m not going to spend much of that because I have everything I need but let’s say a household of 30,000 rupees they’re earning and if their income goes up by 3,000 rupees 10% they’re going to spend that what economist say their marginal propensity to consume is much higher so the benefits of growth are not going to the low income segments the benefits of growth are not widely shared. So that is one problem of the economy which is uh no private investment which in some sense traces back to growing inequality. The second which segus from that is unemployment. uh you know we we talk about a rapidly growing economy for an economy growing at 6.57 7.5% even 8%. We’re not generating jobs. Nobody is idle. People are working but they’re working in the informal sector in nonsecure jobs. So why is the economy not able to generate millions of formal sector jobs that we need? That again links back to private investment. The third concern I have about the economy, I talked about private investment not coming. I talked about jobs. The third concern I have is whether the economy is future ready which is you know there are there is lots of [clears throat] structural forces shaping the economy today. uh there is climate change, artificial intelligence, demographic transitions, geopolitical tensions, globalization, reconfiguration. Are we ready for all of them? Uh and people also talk about the middle income trap which is that economies find it relatively easy to grow from low income to middle income but they find it very difficult to move from middle income to high income because growing from low income to middle income requires does not require you to invent new technologies. All you have to do is catch up with existing technologies. But going from middle income to high income requires innovation, requires investment in frontier technologies in R&D. How we do that? So all the encapsule under is India future ready? So those are the concerns I have. No sir, thank you so much for saying that and uh I just wanted to mention that I am having the best time in the world just talking to you because I’m learning. I’m learning. I’m I’m taking notes and uh the way you put it is so succent. It’s so nice. It makes sense to me and I am able to take notes and with your permission I would love to share these notes with the audience for those who wish to have a more encapsulated version of this conversations. You’ve mentioned problems the issues with the economy as you saw them and you have been very honest and vocal about your primary concern which I’m just paraphrasing here. You have said private investment is not coming. Growth in the past few years has been because of government investing versus what we should be seeing is private investment. It’s not happening. The government is investing which they are forced to do out of borrowings. That’s correct. [clears throat] And you have you have said this is not happening. Private investment is not coming in because there is no demand. There is no demand essentially because the growth and the benefits of the economy are not trickling down fast enough voluminously enough for the sections of society which have as you put it a marginal propensity for consumption which you all explained very nicely and you mentioned why a person who already had a certain middle tier income would not spend too much even if they made more versus somebody who didn’t have that would certainly spend that surplus amount. Then you said that the second largest concern is unemployment and uh you then said that the third biggest concern you have is are we future ready or not and in in that what about the artificial intelligence wave that’s coming at us? What about climate change? Are we ready? Sir, I want to dwell on the dwell on these problems if you will allow me. Sure. actually [snorts] uh so please do explain to me this issue of demand and why the growth of the economy is not the way it should be. Why do you think it is the case? Why isn’t there demand? What does it take for an economy to grow and to be able to do what you see as healthy growth? Well, the ultimate driver of economic growth historically has been productivity improvement. Productivity has to improve. That means people have to be able to produce more with that. It’s same labor, save capital, you should be able to produce more. And uh that productivity improvement is not happening in India as much as we want. Um because of lack of education, lack of skills, lack of sufficient health standards. So I believe that you know actually as you provided me you you let me let this conversation into a broader frame which is that we should also be investing in education in health in skill endowment because when I spoke about inequality in actually income terms or wealth terms but inequality is much broader than that inequality access opportunities. Uh, does a child in a poor family have the same access to quality schooling? Does a child in a poor family have the same access to reasonably good health care? Uh, are there opportunities for skill and skill improvement? But those things we should be focusing on because ultimately growth comes from productivity improvement. Sir, you mentioned also um unemployment you have mentioned and I want to understand is it is it something that the government or the RBI or the establishment let’s just call it can cure can fix is it fixable because the way I see it from what I see it is that it’s too downstream it’s not a problem anybody has uh any any tools like the reporate to tweak and to perhaps fix because what are we going to do with all of this youthful energy in our country? There are not enough jobs and there are obviously not enough jobs because of a host of factors compounded by the fact that we used to be an economy which was dependent upon and actually thriving upon service exports. We were able to export services but this is precisely what has been hit by the AI wave. This is precisely what will continue to get hit further because the purpose of much of the development in artificial intelligence is to make this outsourcing of a and the human in the loop completely redundant. But we were so to speak the human in the loop in the terms of uh the global economy of exports. We were providing the human that would pick up the phone and that would lead the consumer to resolution which is what led to the BO crisis but this seems to be to be unfixible and and the a huge problem not even economically but socially and it might be naive but I would love some optimism if at all there is any yeah there’s no cause for despair but at the same time tackling unemployment is a very complex problem [snorts] it’s even as inflation and fiscal policy. They’re all complex, but at least there is a neat theory. But employment, there is not a single or simple instrument that you can use to generate employment. You got to do certain things in the short term. You got to do certain things for the medium term, for the long term. uh and you got to focus on sectors which are more employment intensive. You got to prepare workers for work. You can you cannot tell medium and small industries go hire this this guy you because that guy has to have the skills necessary. So it’s it’s it’s a very vast program. My concern is that we are not even talking about it as a problem as a challenge that needs to be tackled. Somehow uh the impression seems to be that if the economy grows this problem will just wither away will just blow away. That’s not happened in the last several years. It’s unlikely to happen. So we need growth but we need employment intensive growth. So that is uh you know if frankly honestly if the prime minister asked me okay you’re saying this tell me what I should do I cannot tell him in 2 minutes what can be done it’s a very very complex thing so I wouldn’t share your despair at the same time I believe that it is a complex problem that needs to be tackled as first acknowledge the problem and tackle it [snorts] then there are you talked about uh in the same vein about artificial intelligence whether it’s uh what it’s going to do to our service exports etc. Now it is a big big known unknown about artificial intelligence all the very big debate in everybody knows that [snorts] is it going to create jobs like every technology in the past has or is it going to destroy jobs you know there the opinion is divided on that we don’t know yet but specifically coming to our own economy we were leveraging on service exports service exports have been the backbone of our external [snorts] sector indeed of our growth and we should be proud of that but are we future ready if AI comes in in a big way and erodess some of these jobs are we in a position to move up the value chain and that’s what we should be thinking about see the first wave of art artificial intelligence which is still underway which is you know large language models the foundational models data centers etc which require lot of energy, lot of investment probably we did not have comparative advantage in that. But the second layer which is coming now which is application of AI for health for education for skill endorment that is something that India should quickly find uh a niche a comparative advantage and do so that we can get into the AI bandwagon. we can benefit from AI by exploiting a certain certain niche areas where we have comparative advantage. Sir uh sir with that uh you have already alluded to certain policies in the future that will help us that can help us potentially. Can I ask what you see in the future for our economy? Can I ask you to be um predictive? How do you see us doing in 2035? I know it’s impossible and I know perhaps you probably would even like to go there but uh I’m just looking like I said for some optimism. You’ve given me some at least you’ve you said given me enough reason not to despair. But how should I look at the future of our country or the economy of our country? You know I think someone groucher marks I think said never make a prediction especially about the future. So, [laughter] so you asked me to make a prediction. Now, [clears throat] throw your mind back to 2016, 10 years ago. And if somebody asked you in just a thought experiment in 2016, somebody asked you know what would India be like in 2026? Would you have been able to predict like what it is today? 2016 remember we did not even WhatsApp had just come in 2014. uh internet expansion had to take place the explosion of uh uh lowcost internet that we saw the jam revolution in India that are yet to unfold the UPI was yet to come in uh you know so in 2016 these were even beyond the realm of imagination so today in 2026 we taking all this for granted and our economy has certainly benefited because of that and I believe that a living standards have certainly gone up. You know, rising tide lifts all the boats. I talked about inequality, but uh certainly a rising tide has lifted all the boats. Even the bottom segment have moved up, but they’ve not moved up as much as the upper segment. Okay. So, if I to look back look ahead 10 years from now, uh 2036, AI will come in in a big way. Uh whether it create jobs, destroy jobs is unclear but it’ll certainly make no it certainly ease living there. There’s no doubt about it. is certainly east living whether that will contribute to productivity improvement is not a question that I can dwell on because a big debate in economy among economists about some people say that even the even internet has not led to productivity improvement on the other hand I know that if I you know for example just to give an example if I to make if I to find a book you know what is said in a book earlier I had to go get ready go to a library look up the book if I find the book and come back. Okay, it will take half a day. Today it will take one minute for me to find out. So how can you say that internet has not improved productivity? Some economists say productivity meas definition [clears throat] is wrong. I’m sorry I’m getting I’m getting away from your main question. But the question is in 2036 life ease of living might be better. Uh quality of life in some sense might be better. We might be having more leisure. uh whether everybody will have work to do or whether there’ll be a hollowing out of the middle in the sense that uh only the upper segments benefit uh there are some people who benefit more than other whether it’ll widen inequality is very unclear at this moment. Uh sir, can I ask you if you could have the government do anything, what would you have them do to make sure that the future is uh the way you want to see it? You know, that’s a difficult question again. Uh but uh I would prepare, you know, I’m sure the NTIO is doing it. One is a medium-term outlook what we want to do on various policy fronts but one is a long-term thing. Okay. Uh the prime minister has been in office for 12 years. So he should be I mean the thought occurred to me that he should be worrying more about his place in district and he should be transitioning from a political leader to a statesman and statesmen look after the next generation. So I would tell the prime minister of the government as much as you are engrossed on and firefighting or looking forward to the next three years next election look at the next generation what are are you making India future ready that’s the question I would ask it’s such a great question to ask um sir I have so many more questions but and not enough time not enough no not enough time. So in those 10 minutes and I know I know that I searched for uh I I asked for optimism and I’m going to ask a question which doesn’t really necessarily lead to it but my question is the opposite of the question which I asked earlier about what would you have the government do. My question is what nightmares do you have from the point of view of our our economy that keep you up? What is it that you worry about the most? You know, fortunately, I am retired, so I worry as a citizen. Of course, uh I agonize over that, but I’m not in a position to worry because I have to do something. Those jobs are behind me. Okay. So, certainly as I said, you know, if I throw back 50 years when I first started on my career, India has certainly improved [clears throat] and that there’s lots of changes. Uh I’m not saying it’s because of one government. Excuse [clears throat] me. That’s unfair to say. It’s uh a result of successive governments. It’s a result of uh what the government missionary including civil servants have done. It’s a result of what the private sector has done. It’s a result of what the entire country has done. You know it’s not just the civil servant but it’s teachers, doctors, private sector people. Everybody has contributed. So we are in a better position today than we were 50 years ago, than we were 10 years ago. But I still worry about u whether it can be a developed country by

2047. By developed country I mean uh whether we not only have high per capita income not on an average basis but uh with less inequality more or less equal. It cannot be perfect equality you know but as close to equality as possible. Not only a good quality of life but whether you know there is uh stability like I know happiness around like people talk about Scandinavian countries today which is that not only do they enjoy uh growth but they enjoy a quality of life which comes from emotional well-being. So I I I would think that is very important and emotional well-being of the bottom segments of the bottom 500 million of idiots.

That is a great thought. I get you know they don’t have to get up every morning and worry about will I find work will I find money today. This is the it’s a great thought sir and it’s not asked often enough and I don’t think very many people actually worry about it which is what makes you uh very special and I I have no more fundamental questions sir. In fact I have the questions I have I want to reserve for a future conversation if if you will allow it because because I would do this all day long and uh I would love to delve deeper. I don’t know to what extent I was successful in bringing out the fundamentals in in asking relevant questions, good questions but whatever I did ask you answered beautifully and you explained it to us so nicely. In fact, what I’m going to do for the viewers is I’m going to take this transcript of this conversation and turn it into a very basic primer for any citizen or for any lay person who wishes to understand what really is going on take from what you’ve taught us what you’ve explained to us and then I’ll pass it on so that primer will be ready for them if they read through it they should be able to understand much of what is going on around them when they see the newspaper or when they hear the economy is going Well, they should be able to understand what exactly is it does it mean to say that the economy is doing well? What does it mean to say that there is growth? What exactly is the type of growth that we require or should aspire for? Those are the things that I think you have helped us even though they came intermittently in your answers. They were there and for that I’m very grateful also. Thank you so much for your for your time and for your wisdom and for sharing it with us so generously. Thank you. Thank you Ravi. You’ve been very good actually in asking very searching questions and I had to go back you know think back uh on giving credible answers but uh I hope it’s been useful. I wish you and your viewers all the very best. Thank you. Thank you. Thank you very much sir. [bell]