RBI identity has been damaged: Former governor Y V Reddy

In a TV interview, he said impression now is that RBI is now only responsible for monetary policy

Former Reserve Bank of India (RBI) governor Y V Reddy criticised the state of affairs at the central bank, stating that the institutional identity of the hallowed organisation has been damaged. 

In an interview with CNBC TV18, Reddy, who served as RBI governor between September 2003 and 2008, said the impression now was the central bank was now only responsible for the monetary policy. Earlier, the impression was the RBI governor was as powerful as a minister. 

“Now, there is a committee where the Cabinet secretary is the chair and the governor is a member,” he said. 

The government in May 2016 formed a search-cum-selection panel headed by Cabinet Secretary Pradeep Kumar Sinha to select deputy governors of RBI. This was seen as a significant infringement on the autonomy of the central bank; earlier, the RBI governor used to head the panel for selection of his deputies. 

“To be very frank, my own suspicion is that the institutional identity of the RBI has been damaged. Earlier, the RBI was the monetary authority. But it was a full-service central bank. The recent emphasis is that monetary policy is the main function,” Reddy said.  

“Then is he not accountable to regulation? Is he not accountable to currency coins? There is confusion about relative importance. That relative importance is being decided more outside than within.”

He added, “The procedure applicable for a regulator has to be different from the procedure applicable to the monetary authority. In a central bank, regulation is one function. There is some lack of clarity.”

However, this devaluation in the status of RBI is not a recent event, and “cuts across political affiliations,” Reddy said. 

Comments from economists and rating agencies about RBI were “disturbing”. “For the RBI, for a central bank, reputational risk is the worst risk. Credibility is the worst risk. And if this is happening in the international opinion, I would say that it is a national problem now and it is not just a political issue.”

“I think it is time, it is like army which is the security of the country, the financial and monetary security of the country. So, there should be a debate at this juncture given the type of comments internationally cutting across political parties that what should be the nature of central bank and what it should be and how it should be run.”

However, he did not blame any individual. 

“The limited point is, the role of central bank in our economy is under threat and it is a national problem which has to be addressed as a national problem.”

In the interview, the former RBI governor said demonetisation leads to incidental benefits in the fight against black money, through unearthing information. 

“So, demonetisation and black money link is not direct, it is indirect and incidental analytically. There are a lot of other implications as we go along.”

“If I have to be analytical, conceptual, academic and not ex-governor, the way I look at it is from a practical point of view, the pain has happened, going forward to the extent possible we would quickly relieve the pain. More important is gain, how do you maximise the gain? In that sense therefore I would say this is the beginning of handling the problem of black money,” he said. 

“Black money is a result of several factors. The most important being there are two actors, one is the administration; the other is the people who are indulging in black money. Unless both are in some ways colluding it won't happen.”

India has also one of the lowest tax rates in the world, lower than the advanced nations, and therefore the idea that taxes should be reduced is “ridiculous,” said the former RBI governor.