RBI facing 'reputational' risk: former Governor Reddy

Former Governor V Y Reddy today said that RBI is facing 'reputational' risk and its identity as an institution has been damaged.
He also opined that the problem of black money cannot be eliminated only by destroying cash through demonetisation.
"There is a confusion (about the role of RBI) at philosophical level. There are two types of confusions. To be very frank, my own frustration is that the institutional identity of RBI has been damaged," Reddy said in an interview to CNBC TV18.
Reddy, who served RBI for 11 years as deputy Governor and Governor, regretted the fact that RBI is being treated just as a regulator although regulation is only one of the functions of the central bank.

"The RBI is a monetary authority. Yes but it is full service central bank ... It was incharge of many other things. The recent emphasis appeared as though the monetary policy is the main function. Governor is accountable to monetary policy. Then he is not accountable to regulation, he is accountable for currency coins.
"There is confusion about the relative importance. The relative importance is being decided outside more than...," he added.

Noting that the procedure applicable for a regulator has to be different from the monetary authority or central bank, he said, "For central bank, regulation is just one function and to say that head of an institution who performs eight functions and one function is regulation is equal to other regulator. I think there is some lack of clarity."

Expressing concern over comments against RBI by international agencies like S&P, Reddy said, "for central bank reputational risk is worst risk, credibility is the worst risk. If this is happening in international opinion I would say this is a national problem now."
He also called for national debate cutting across party line on the autonomy central bank.
"I think it's the time there should be a debate at this juncture, given the type of comments internationally, cutting across parties that what should be the nature of the central bank and how it should be run," he said.
Comparing RBI with army, Reddy said that financial and monetary security of the country rest with RBI.

He also suggested that financial stability function should have been with non-political set-up like RBI Governor.
Most emerging economy financial instability, political instability happen simultaneously, he said.
On the demonetisation, Reddy said, "the black money problem cannot be solved by destroying cash. It is a bigger problem."
Asked whether the position of RBI Governor has been devalued, he said, "definitely there is a problem especially after legal amendments, the way Governor is selected, the way deputy Governor is selected.