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Let’s not overstate the independence of the RBI, says former governor Dr YV Reddy

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The former RBI governor weighs in on the independence of the central bank, the recent MPC controversy and the farm loan waivers across the country. 

He doesn’t want to take any questions about the dramatic exit of previous Reserve Bank of India (RBI) governor Raghuram Rajan or the tenure of the current governor Urijit Patel. But former RBI governor Dr Yaga Venugopal Reddy does believe there is too much being read into the differences in opinion between the central bank and the government on various issues.

“You have to have disagreements, otherwise why would you create the RBI? Is it a subordinate office? It is not,” Reddy, who is releasing his memoirs titled Advice and Dissent: My Life in Public Service, told The Print. 

Pointing to the fact that in 1969, the central bank had opposed the nationalisation of banks, Reddy says that every difference in opinion between the central bank and the government cannot be perceived as a quarrel between the two.

“I think we should have a sense of proportion in assessing what is a debate and what is a difference in points of view, what is a debate and what is a quarrel. I think that distinction is not being observed,” he said.

There was a recent controversy regarding the Monetary Policy Committee members declining a meeting with finance ministry officials before a monetary policy review. But Reddy does not describe it as a break for independence by the central bank. It is a problem of communication protocol and it varies from nation to nation, he said.

“We have just started this recently. So there are several channels of communication. I think there is yet to be a firm understanding of what is appropriate and what is not,” Reddy said.

The former RBI governor said that there seems to have been a misunderstanding among members of the committee that they were ‘summoned’ due to a lack of appropriate conventions on communication.

“It is an evolution. It’s a process settling down and these are issues that have come before in other countries also,” the former RBI governor said.

The cover of Dr YV Reddy’s new book. Source: @HarperCollinsIN

While he didn’t want to dwell on the subject of demonetisation, something he has spoken about in the past, the former RBI governor did speak about that the independence of the central bank and its limitations.

“If I had to generalise on the basis of my experiences, essentially the Reserve Bank of India is part of the overall structure of the government. Therefore it can only be independent within the governmental structure. That’s one thing you have to recognise,” he said.

“All over the world, even in advanced economies, during the (2008 financial) crisis, the strong faith in the independence of the central bank is slightly shaken. So you should not overstate this concept of independence. What we should do is look at how it (RBI) is able to perform and how the government and the RBI are able to work together,” he said.

In his book, Reddy points out that he was a vocal opponent of the 2008 farm loan waiver granted by the then UPA government. So what does he think of the debt waivers being granted across the country?

Reddy said such waivers shouldn’t be considered purely on the basis of how it affects the credit culture among farmers, but of the entire economy.

“If you ask the farmers, their answer is simple, ‘Please tell us how much restructuring of the loans you have done for the big industrialists each year and the number of people who have got relief?’ So therefore on the relative scale: how much did you write off for Air India, for whose benefit did you write off the loans? It is a broader issue of credit culture. Why are you trying to make a big issue about the credit culture of the farmers?”, Reddy said.

The former RBI governor advocated an approach where debt waivers target those worst hit.

“…the main point is if it is based on farmer suffering, doing it on an all-India basis assumes that farmers everywhere are suffering…One hope is that in the next stage it will be localised and not across the states,” Reddy said.

He’s also of the view that the issue of non-performing assets (NPAs) of banks shouldn’t be exaggerated because the effect it could have on the economy.

“There is an NPA problem. Sometimes it is manageable, sometimes it is very high. But if we exaggerate the problem then the flow of credit will be affected,” Reddy said.

“If you exaggerate on the problem of NPA then your concentration on the problem of expansion of credit becomes less.  It doesn’t help exaggerating,” he said.


Advice and Dissent: My Life in Public Service is published by HarperCollins India

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