Former Reserve Bank of India governor Y.V. Reddy’s five-year term, which ended in September, was characterized by the highest average growth rate achieved by the Indian economy and the lowest average inflation since independence. Eight months after leaving office, Reddy resurfaced in Mumbai last week to launch his book, India and the Global Financial Crisis: Managing Money and Finance. Those who were expecting a sort of “tell all” story from Reddy will be disappointed because it’s just a compilation of 23 speeches that the former governor delivered at various forums in
India and abroad in past years and one can log on to the Indian central bank’s website and download all of them. But what makes this book interesting is its introduction and epilogue. While the 30-page epilogue talks about the global financial crisis and India, the 34-page introduction explains in what context these speeches were delivered and Reddy’s compulsions. The context for most of the speeches was provided by the serious differences between the finance ministry and the central bank on many critical issues, but Reddy hides more than what he reveals. In an interview with this paper, he downplayed the differences, terming them “creative tension”, but those who had seen the period from close quarters vouch that there was nothing creative about it and the tension was at times unbearable.
Extremely cautious: Former RBI governor Y.V. Reddy’s book gives a very subtle account of his differences with the finance ministry. Abhijit Bhatlekar / Mint
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True to his wont, Reddy is very nuanced in his approach and one needs to read between the lines to appreciate the real story behind the “creative tension”. One of the instances that Reddy cites in his book, lauding the government for the “unstinted
support” that was “critical” in strengthening the banking sector, refers to the finance ministry’s acceptance of the fact that RBI should have the last word on an issue such as foreign investment in a holding company of a large private sector bank. His introduction says, “The government approved select foreign investments in a holding company structure with respect to a large private sector bank, which was itself a conglomerate with commanding foreign ownership; however this was subject to the approval of the RBI.”
What was the real story? The large private bank is ICICI Bank Ltd, India’s largest private sector lender. It planned to float an intermediate holding company for its insurance and mutual fund businesses and even sold a substantial stake in the proposed holding company to a few foreign investors. The government approved the plan and even the foreign investment promotion board that deals with overseas investments in local firms cleared the proposed investment by foreign funds in this venture. This was done despite RBI’s strong reservations; the central bank felt such an innovative structure could not be supervised adequately. With extreme reluctance, the finance ministry had to accept RBI’s wish to form a working group to look into the proposal. And, predictably, the working group took its own time to frustrate the bank and prospective foreign investors in the venture before saying it was not “desirable”. By reading the introduction, one would not get a sense of the bitter battle that the ministry and the central bank fought on this issue, with RBI refusing to budge even an inch from its stance.
Similarly, the introduction has just a reference to RBI’s reservations about the creation of sovereign wealth funds and use of foreign exchange reserves for infrastructure development. The real story was very different. It was possibly the toughest fight that the Indian central bank waged with the ministry opposing the use of foreign reserves for any other purpose than what the existing law permits. If RBI insiders are to be believed, the ministry went to the extent of reaching out to the board of the central bank, seeking help to convince Reddy.
And that was not the only occasion when the finance ministry stepped into the central bank’s domain on the sly. At least two bureaucrats in North Block, which houses the finance ministry, in private, confided in me that when former finance minister P. Chidambaram called deputy governor Rakesh Mohan for an “interview”, which the ministry was conducting through a committee to identify Reddy’s successor, Reddy was not kept in the loop. Mohan, who was in the US, had to cut short his official trip to rush to North Block, where State Bank of India chairman O.P. Bhatt was also called for a tete-a-tete. Mohan did not make it to the top post that went to then finance secretary D. Subbarao. The book, however, does not mention this even subtly as there was no speech on how RBI governors are chosen!
The “creative tension” between the ministry and RBI was all-pervasive as much because of Reddy’s sense of independence as the ministry’s intrusion into the central bank’s turf. Not too many people, even within RBI, had a ringside view of such fights as Reddy is a very private person, one who does not believe in washing office linen in public. But things get worse when the finance ministry takes the fight to the public by openly talking about market-sensitive issues such as interest rates and liquidity, and forces RBI to toe its line. Reddy’s five-year regime was fraught with such instances. The so-called coordination on such issues is fine in troubled times, but with the finance ministry, it has become a habit.
One wishes the introduction to the book was less subtle. Reddy has been extremely careful not to let the cat out of the bag. But those who managed to get a glimpse of the cat could see its true colours.
Tamal Bandyopadhyay keeps a close eye on all things banking from his perch as a deputy managing editor of Mint. Please email comments to email@example.com