Former Reserve Bank Governor YV Reddy on Monday said: “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 an interview to CNBC-TV18 channel, the former Governor also said, “my own suspicion is that the institutional identity of the RBI has been damaged.”
“I would even go to the extent of saying that particularly recent events, I have seen the comments from economists, from Standard and Poor’s and they are 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,” Reddy said.
“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,” Reddy said.
“The question is that there is a problem of reputation and the reputation cannot be ascribed entirely to individuals. There has been institutional changes and procedural changes which have created confusion about the identity itself and effectiveness and therefore, the reputation. Now, what should be the new structure?” he asked. “There should be better clarity about the new structure. The old framework, whatever the background, which committee, which commission, which judge produced it, we need not go into it. 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.”
On withdrawal of Rs 500 and Rs 1,000 notes, Reddy said: “Any demonetisation that occurred generally by itself takes care of the currency. It becomes a fight against black money incident because of the incidental benefit of getting information or making it non-valid. So, demonetisation and black money link is not direct, it is indirect and incidental analytically. There are lot of other implications as we go along. At that point of time we had not thought about it.”
On the impact of demonetisation, Reddy said, “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.”
Reddy was also critical of the way Governor and Deputy Governors is selected. “Whatever it is, definitely, I think there is a problem, especially after the legal amendments, the way the Governor is selected, the way they are interviewed basically, let me tell you, if the Deputy Governor has to be selected by an interview by a secretary, I was myself a secretary, I cannot be interviewed by colleagues and juniors for a job. There is no way I would go,” he said.
“At the moment, I think there is a committee where the Cabinet Secretary is the Chair and the Governor is a member. Let me be very frank. I have a feeling that the RBI is treated as a regulator to the confusion at a philosophical level. There are two types of confusion. To be very frank, my own suspicion is that the institutional identity of the RBI has been damaged, let me be frank,” Reddy said.
Of late, there’s more emphasis on its monetary policy, he said. “Earlier, the RBI is the monetary authority, yes. But it is a full service central bank. It was in charge of many other things. The recent emphasis appeared as though monetary policy is the main function. Governor is accountable to monetary policy. Then he is not accountable to regulation, he is not accountable to currency coins? There is a confusion about relative importance. That relative importance is being decided more outside than within,” he said.
“And the final analysis and particularly, for our country, the financial stability function should have been with a non-political set-up like Governor of the RBI. Now, that initiative is gone to the government,” he said.