Money & Banking

How independent can a central bank head be?

G Naga Sridhar Hyderabad | Updated on January 12, 2018 Published on January 13, 2017

YV Reddy

Former Reserve Bank Governor YV Reddy pens his memories

In a first-of-its-kind insight into his term as RBI Governor, YV Reddy says he agreed to disagree with the government many a time, but always stood his ground.

This and other revelations have been disclosed by Reddy in his autobiography Na Gnapakalu ( My Memories), which was released in Telugu last week by Emesco Books.

Reddy’s reminiscences assume significance amid the current debate about the autonomy of RBI vis-a-vis the government, thanks to demonetisation.

The conflict between Reddy, who served as Governor in 2003-08, and then Finance Minister P Chidambaram, crescendoed on the issue of allowing FDI in private sector banks.

FDI debate

Reddy felt the time was not yet ripe to permit FDI in banking. Chidambaram, however, said the government cannot go back on its promise made to international powers. “Decisions cannot be changed when a new RBI governor comes,” he reportedly told Reddy.

But Reddy did not give up. “I called up the then Secretary of Economic Affairs Rakesh Mohan and told him — I will get admitted in a hospital under the pretext of some illness and quit from the post later. They can appoint a new governor and do whatever they wish to do. Please convey the same to the Finance Minister,” Reddy recalls in his book.

A compromise was worked out finally. The Ministry agreed to a ‘road map’ on the policy which was announced in the 2005 Budget. And Reddy made the road map so long that by the time it was implemented he had retired from the post!

The government kept a keen eye on his speeches, recalls Reddy. Chidambaram did not heed an advice by the RBI to ban Participatory Notes, and Reddy was upset. “I was desperate to do something to prevent P-Notes and wanted to raise a policy debate,” he says in his book.

At a conference in Mumbai, he spoke at length on the ill-effects of P-Notes, besides the Tobin Tax linked to it.

Chidambaram called immediately, taking strong exception to Reddy’s speech.

“The matter did not stop there. I got a call from the highest level later and I had to convene a midnight press conference to say it was just an academic reference,” says Reddy. But, he stood his ground and signed a note of dissent on the Lahiri committee report which favoured a liberal policy towards P-Notes later.

Another row sprung up on Reddy’s suggestion that the RBI produce its own currency paper, as imports could lead to fake notes.

“I came to know the government did not like the RBI to take up the issue...” Reddy discloses. He finally convinced the government to set up a paper mill jointly with the RBI to manufacture currency paper.

Question of perspective

Reddy, however, does not see these differences as personal. “These are due to the clash of political interests of the government, which will have a five-year view, and the RBI, which will have a long-term view for economic stability,” he concludes.

Published on January 13, 2017
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