New Delhi, January 10: Former Reserve Bank of India Governor Y V Reddy expressed his deep concerns regarding the current state of affairs at the central bank and said that the institutional identity of the hallowed organisation has been sacrificed.
In a TV interview to the CNBC TV18, Reddy who served as RBI governor from September 2003 to 2008 said that the central bank is now only responsible for the monetary policy while it was a strong portfolio earlier.
“Now, there is a committee where the Cabinet secretary is the chair and the governor is a member,” he said.
Eversince Prime Minister Narendra Modi announced noteban on November 8, the U-turns and flip flops of RBI directives and Finance Ministry’s explanations thereof has put a big question on the autonomy of RBI as an institution. Indeed Governor Urjit Patel’s silence on demonetisation in the initial days of note ban made more noise than any of the central government’s Union Minister’s remark on the same.
Reddy pointed out that Modi government in May 2016 formed a search-cum-selection panel headed by Cabinet Secretary Pradeep Kumar Sinha to select deputy governors of RBI which is “a significant infringement” on the autonomy of the central bank. Earlier, reddy said, the RBI governor was the head of 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.
Raising some of the valid questions about Governor’s responsibility and accountability 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.”
He further said that the fall in the in the status of RBI is not a recent event, and it has come “across political affiliations.”
Talking about the rampant criticism of RBI by media, economists and credit rating agencies, he said “reputational risk” is the worst risk and this time RBI’s credibility is at risk which is the worst risk. He added all this, “happening in the international opinion…is a national problem now and it is not just a political issue.”
Drawing an interesting comparison with the Army who is liable for the security of a country, the former governor said that RBI is responsible for the financial and monetary security of a country.
“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,” said Reddy.
The ex RBI governor also said demonetisation would incidentally benefit in the fight against black money by unearthing banking information of people. “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,” he said.
“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.
The ex-governor refused to take any names and said that black money is a result of two most important factors– one being the administration and the other is the people. “Unless both are in some ways colluding it won’t happen.”