Mumbai: In 1997, an internal committee of the Reserve Bank of India, or RBI, prepared a report on why the Indian central bank should not remain the government’s debt manager. The then governor Bimal Jalan was very impressed with the “excellent report” but felt that it could not be implemented because of the fiscal situation of the country.
So he asked his deputy, Y.V. Reddy, to prepare a note on why RBI should not follow the recommendations of the report and signed it.
Eleven years later, Reddy revealed the “secret” at a meeting with reporters after he handed over the charge to the new governor, D. Subbarao.
“You must see everything in context,” he said.
Reddy, who is leaving RBI after an 11-year stint—six years as a deputy governor and the rest as governor—is not a great believer in exit interviews. So he had high tea with editors of business papers and news channels and said every action of RBI needs to be seen in context. For instance, derivative products such as interest rate futures and currency futures should have been introduced much earlier in Indian markets but can RBI afford to be aggressive with “futures” when the spot market is “inadequate and imperfect?”. “To what extent volatility is acceptable in markets? Can all market players manage the volatility equally?” Reddy asked.
Banking stalwart: Y.V. Reddy spent six years as deputy governor and the remaining as governor of India’s central bank. Abhijit Bhatlekar / Mint
He started his informal meeting with one caveat—everything he said would be analysis and not his views. “It is inappropriate for me to voice an opinion. What I will do is only analysis,” was his preamble.
Like interest rate and currency futures, Reddy would have wanted to have capital account convertibility “yesterday” but that could not have been done as “one needs to have the macroeconomic features in place.”
During his five-year term, Reddy did not cut the interest rate even once. Towards the end, in past five months, he has raised the rate by 125 basis points and banks’ cash reserve ratio (CRR) or the money that banks need to keep with RBI, by 150 basis points in phases to rein in inflation. One basis point is one hundredth of a percentage point.
Some analysts say he has been unnecessarily hawkish while others say he was behind the curve. What is his own assessment?
“It if for others to say whether I was ahead of the curve or behind the curve. What I know is if I had my way, it (monetary policy) would have been tighter...”
Does this mean that he did not have his way? “Nobody can have his or her way in public policy.,” was his answer.
Is this a tacit admission of the popular perception that RBI and finance ministry were never in sync? Reddy did not have a straight answer for this. “The very fact that the central bank can express its views is a testimony to the government’s respect for RBI. If there is no independence, we would not have been able to express our views.”
“If finance ministry agrees to everything what we do, then our existence is superfluous. And if it disagrees, then it’s obnoxious,” he said, in a quintessential Reddy remark.
“Indeed, we had the full support of the ministry. Otherwise we would not have been able to do what we have done for some of the private sector banks such as GTB (Global Trust Bank Ltd) and urban cooperative banks,” he said. RBI forced GTB’s merger with a public sector bank when the private bank was crumbling under the burden of its exposure to the capital market. It entered into agreements with most of Indian states for better governance of urban cooperative banks.
Does RBI have autonomy? According to Reddy, it has “reasonable operational autonomy”. “Independence is very contextual....”
Five years ago, when Reddy took over the mantle from Jalan, India’s inflation rate was less than 4%. It has gone beyond 12% despite Reddy’s hawkish stance and successive rate hikes. Why has it happened? Reddy’s response was a counter-question: “Which country’s GDP (gross domestic product) has grown 50% in five years?” According to him, over the medium term, “you can’t have growth if you don’t bring down inflation”.
Reddy was noncommital on the challenges before the new governor, as “every governor seems to manufacture his own challenge”.
The key take-away from his tenure as the country’s chief money man? “It was a great education and I only hope that there was not too much of cost for my education.”
Did he refuse his extension because it was not a three-year term as is widely believed? “There was no formal discussion on extension,” was his answer. After the meeting was over, he asked editors: “Have I been indiscreet?” No, he was not. In fact, as a central banker, Reddy was never indiscreet.
Nor did he let his guard down. He declined to talk about his life after retirement. “I have absolutely no plan. The only thing I know is that I won’t have to apply for leave from tomorrow.”