THE MAJORITY OF market participants would be entirely justified in thinking that the Reserve Bank of India Governor, Dr Y. V. Reddy, was actually placing certain policy options before the Government on the question of portfolio investments by foreign institutional investors (FIIs) rather than indulge in an academic debate on the question that is devoid of any near-term operational implications when he raised that issue. The circumstances were clearly suggestive of such an interpretation. The occasion, after all, was the formal release of a report by a Mumbai think-tank on the state of the Indian economy, addressing as Dr Reddy himself pointed out contemporary policy issues. The Governor's speech leading up to those controversial remarks on FII flows dealt with the current state of the various facets of India's macro economy.

Any reference to policy issues, then, clearly has implications to what the Government ought to do or not. Of even greater significance is that his remarks on FII flows themselves were made in the context of what he referred to as `emerging concerns' in the management of non-debt capital flows of which portfolio investments by the FIIs are clearly a part. Even assuming that he was indeed hypothetically reflecting on placing fetters on the FII flows, then he should, in all fairness, have expounded on the macro economic parameters whose presence would warrant the imposition of the restrictions. But a larger point needs to be made as well: The flutter his remarks caused in the market has perhaps to do with the general perception that the RBI should at all times reflect the official thinking on all policy matters. As a corollary, Dr Reddy's observations too were seen as a reflection of official thinking. And that to the extent they were not reflecting the official line, there was an element of impropriety in the action. But such a perception is wholly unwarranted.

It can be nobody's case that Dr Reddy ought not to have raised the issue of the placing quantitative/qualitative restrictions on FII flows. The mandate of maintaining price stability in the economy imposes on the RBI an obligation to set for the Government the policy agenda whose implementation could have a positive impact, either directly or indirectly, on the inflationary impulses in the economy. What he has said should therefore be seen as a policy initiative that he regards as essential. It is another matter that the legislature may see things differently; in a democracy, popular will expressed through its representatives is always supreme. It would, therefore, be entirely in order for the RBI to place certain policy issues for the consideration of the Government and for the latter to either accept or reject them. If this is well understood, there would be no need for the RBI to maintain a façade of unanimity with the official thinking or for dissent from the official line to be seen as an act of impropriety.

(This article was published in the Business Line print edition dated January 14, 2005)
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