Mumbai: Former deputy governor of the Reserve Bank of India (RBI), S.S. Mundra, spoke to Mint on the impasse between the central bank and the government. In a video interview for the series ‘Mint Insights’, Mundra said the impasse “has reached this stage due to serious gaps in communication between the two parties". He said one of the jobs of any central bank was to ensure regular engagement with all stakeholders. “Central bank must pronounce their views, but also be ready to listen. Probably there is room to be a little more receptive to feedbacks or wish-list from the authorities," said Mundra. Edited excerpts:

For a country like ours, which relies on imported capital, what kind of signal does the stand-off between the government and the RBI send out to investors?

As far as any stand-off between the government and RBI are concerned, these are not very unique or unusual. So, to think that investors will suddenly be more scared and draw out capital, that is not the case. The problem is that sometimes in the media, these things get too enlarged.

To my mind, many things have reached this stage because of a serious gap in communication. You have to try to understand that one of the jobs of any public agency, and the central bank is not an exception, is to have regular engagement with the external world, stakeholders, and pronounce your position—which is also a policy tool, but also listen to the inputs of other people. When there is complete reluctance for communication from the outside world, if no one outside is given a viewpoint and, if the same is happening within an organization, and if there is a governing body or a board, and even their discussion is not as free-flowing as it should be, a pent-up resentment over a period of time builds up.

What about the government invoking Section 7(1A), which is really unprecedented in the history of this country. This can’t only be about non-communication, can it?

We should not jump to the conclusion that someone will be as gravely irresponsible as to exercise this kind of a provision. If that was the case, and if you look at the recent past—the kind of enablers which were given, which were never given in the past, if the attitude was such irresponsibility or arm twisting—such enablers in the first place would not have been given.

So, you think somewhere there was a lack of judgement, in terms of the communication not being proper?

Surely. There was probably room to be a little more receptive to feedback, or wish lists, not just from one authority, but all stakeholders—because, as a central institution, when you affect several parts of the country and economy, you should be very well prepared to at least listen to those views. To my mind, better communication and a little more dealing with systems effectively, which comes with more administrative expertise, we could have avoided this.

There is also a view that the liquidity situation could have been handled better..

One has to look at two things—whether the liquidity crisis was transitory in nature, or whether it was more fundamental. And, depending upon their assessment, they would have to apply the tool. They cannot provide structural liquidity for a transitory problem, or vice-versa. More over, it is an integrated economy where there are market operations, and there is an issue of flows coming or flows being neutralized. These things have their own liquidity dynamics. So, it is unrealistic to admit, that overnight, there will be a magic wand and these issues would addressed. On this front, I must say that the RBI has been managing the liquidity situation quite well. I think more anguish maybe in store, where people will expect that there should be a sectoral injection of liquidity from the central bank.

And, that is not something that the central bank, in its present mandate, would do or like to do. To expect that there won’t be another crisis is unrealistic. What is important is to remember that a localized crisis should not become a systemic crisis.

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