T C A Srinivasa-Raghavan: Y V Reddy's structured randomness

OKONOMOS

"There is no explicit mandate for price stability or formal inflation targeting."

Those who are familiar with the speeches of Y V Reddy, the RBI governor, will tell you that he has a unique understanding of the term 'random thoughts' because, in fact, they are exceptionally well-structured, including the "firstly, secondly, thirdly, fourthly... finally" routine. The speech* described below is no exception.

Perhaps irritated by the persistent sniping that the RBI has to face both from agenda-driven critics and uninformed writers, he has chosen to tell the country exactly what it is that the RBI does, can do, cannot do, and must do, all as required by the law or government orders or convention.

The speech is significant as it comes at a time when many economists are pressing for a single-agenda for the RBI: inflation targeting. Reddy's riposte to this is as follows.

"There is no explicit mandate for price-stability or formal inflation targeting. Over the years, the twin-objectives of monetary policy in India have evolved as maintaining price stability and ensuring adequate flow of credit to facilitate the growth process. The relative emphasis between the twin-objectives is modulated as per the prevailing circumstances and is articulated in the policy statements. Consideration of macroeconomic and financial stability is also subsumed in the articulation of policy."

This is consistent with the existing law, which states that the RBI has to "to regulate the issue of Bank notes and keeping of reserves with a view to securing monetary stability in India and generally, to operate the currency and credit system of the country to its advantage".

He also points out that "while the RBI is essentially a monetary authority, its founding statute mandates it to be the manager of public debt of the government and banker to the government." In a like manner it has also been tasked with "banking regulation and supervision by a separate enactment in 1949".

On the management of foreign exchange, he says "...the objectives of foreign exchange regulation have been redefined as the facilitating of external trade and payments as well as the orderly development and functioning of the foreign exchange market in India." He is silent though on the need for anyone to manage foreign exchange. This is one of the areas where the RBI has been under very sharp attack.

He then describes the RBI's decision-making process but concedes that "...as in the case of most of the central banks, the Governor holds a somewhat unique position in the organisation. The legal systems as well as tradition do bestow some authority on the Governor that is meant to be commensurate with this unique position."

But he carries the can as well. As a recent editorial put it, "The governor has heard too many fellow-governors in too many swank conference rooms inveighing against the evils of inflation. As a result, the RBI has developed a phobia about inflation. It has forgotten that the economy also has to grow. Y Venugopal Reddy also does not realise that, however much he squeezes the economy, he cannot bring down inflation below a certain point..."

On the issue of independence, he says that "...while making every effort to give its views, either informally or formally, but as unambiguously as possible, the RBI generally respects the wishes and final inclination of the Government." In other words, the RBI is on a leash, never mind that it is a very long one.

The key element in independence of course is the relationship with the finance ministry and Reddy has devoted an entire section to it in his inimitable firstly, secondly, thirdly style. Space constraints oblige me to confine myself to the 'finally' point only. Thus:

"Finally, if a central bank always concurs with the Government, the central bank, as a distinct entity, becomes superfluous, while if it persists in constantly disagreeing, it becomes obnoxious. In reality, the relevant issue is how checks and balances work in a given context."

*The Indian Economy and the Reserve Bank of India: Random Thoughts (Shri Yeswantrao Chavan Memorial Lecture 2007-08, Indian Institute of Public Administration, Maharashtra Branch, Mumbai, on March 31, 2008