Mumbai: Yaga Venugopal Reddy, governor of the Reserve Bank of India (RBI) till late last year and the man credited with saving the Indian financial system from the worst effects of the global meltdown, will make his first public appearance in India in eight months on Friday. The occasion is the release of his book, India and the Global Financial Crisis: Managing Money and Finance.
Since he left the Indian central bank, Reddy hasn’t been seen or heard anywhere in India, discussing the credit crunch or the safety of the financial system. His two illustrious predecessors, Chakravarty Rangarajan and Bimal Jalan, have been a regular sight in the North Block on Raisina Hill in New Delhi that houses the ministry of finance, advising the Union government on its fiscal stimulus packages to fight the economic slowdown, but Reddy is possibly not consulted on such issues any more after he left RBI. In the social and academic circuits of Hyderabad, where he lives, too Reddy is rarely seen.
It would appear that Reddy doesn’t have time for himself, his city, even India. That shouldn’t surprise anyone—it looks like the whole world wants a piece of the man.
Global central banks and multilateral agencies have been inviting Reddy to share his experience—how he managed to ring fence the Indian banking system and insulate, to a large extent, the world’s second fastest growing economy from the crisis.
Reddy has probably lost count of the number of fora where he has spoken since September, after he stepped down from the Indian central bank a week before the collapse of Wall Street investment bank Lehman Brothers Holdings Inc. He has spoken at the Bank for International Settlements, the World Bank, the World Economic Forum, the International Monetary and Financial Committee of the International Monetary Fund, Bank Negara Malaysia, the Committee on Global Thought at Columbia University and the United Nations (UN) Conference on Trade and Development, among others. He has also been to Singapore and Germany at the invitation of the local governments.
He is also a member of the Commission of Experts of the President of the UN General Assembly on Reforms of the International Monetary and Financial System, chaired by Nobel economist Joseph Stiglitz. The commission meets regularly in different parts of the world to discuss the crisis and rebuilding the financial architecture.
People close to Reddy say he has declined more invitations than he accepted and that, despite this, he has been spending at least two weeks a month “educating” the world on the cause of the crisis and how it could have been avoided.
So, why does the global financial community listen to Reddy? There are many reasons. He saw the first signs of overheating of the economy and made sure that Indian banks were not caught in the bubble. He did not allow Indian banks to take risks that he himself did not understand and didn’t care when investment bankers and bond dealers found him a conservative central banker who avoided innovation. He did not allow banks to hawk credit derivatives and securitize loans aggressively to take them out of their balance sheets. As a result of all these, hardly $1 billon (Rs4,950 crore) of India’s $800 billion banking assets have turned toxic while trillions of dollars are being written off globally.
A cautious and conservative Reddy never allowed Indian banks to take excessive risks. He sensed the real estate bubble ahead of other regulators and curbed banks’ real estate exposures by increasing the risk weight on commercial real estate. The higher risk weight called for more capital and made money more expensive. Similarly, he raised the risk weight on mortgages, consumer credit and capital market exposure. At the same time, he progressively raised provisions for standard assets and did not allow banks to borrow too much from other banks. On top of all that, there was strong and continued moral suasion to dampen banks’ appetite for risk.
In January 2005, the head of a foreign brokerage firm, speaking on a TV news channel, tore apart Reddy for a seemingly academic discussion that evening while releasing a development report of the Indira Gandhi Institute of Development Research. Reddy wanted a public debate on capping foreign institutional investors’ (FIIs) inflows into Indian markets. He also suggested monitoring the “quality and quantity” of FII flows. Within hours, the then finance minister P. Chidambaram appeared on TV channels to clarify that there was no proposal before the government to cap portfolio inflows or tax them. Reddy was forced to hold a press conference at RBI headquarters in Mumbai late the same evening to make it clear that personally he was “not in favour” of a ceiling on foreign funds inflows. Today, even his staunchest critic cannot fault Reddy for being conservative on capital issues. Sometime back Stiglitz told a TV news channel that if America had a central bank chief like Reddy, the US economy would not have been in such a mess.
The world does not talk about Alan Greenspan any more. It listens to Reddy.