YV Reddy saw it all as a central banker.
- Unstable currency markets,
- the dotcom boom and bust,
- searing growth in the Indian economy and
- the onset of the global financial crisis.
- There were some other instances too where I told the government “It’s not my job to embarrass you. I’m your instrument. If you’re going to be embarrassed, I’d better give you notice so you have the option.”
- See, there are certain areas which border on politics and you have to be clear on the choices. The point is that the politician should know what my reaction is and if I cannot do something he has the choice. That’s my way of reminding him of this truth. There’s no point in getting into a fight.
- For instance, there was this subject that could not be done according to the rules. I went to the minister and told him that. He said I should do it. I said: “ok but I tell you what the implications are— legally it is permitted, secondly, you’re accountable to the Assembly and third it creates a precedent.” I told him that if he’s prepared to handle these, he could do it. He said he was prepared to do all this. I then told him to write on the file on what ground he wanted it done. I was not prepared to do it for him. He wrote down the reasoning on the file and I told him “You’ll get the orders in half-an-hour!” I’ve no ego but I insist that it was my right to tell him what’s right, what’s wrong and what’re the implications.
The lesson was that you should not be confrontational but pleasant, especially when you’re disagreeing.
Let’s talk about your famous speech at Goa in 1997 that sent the rupee plunging. What was the thinking behind that “open mouth operation”, as you’ve described it?
Fairly simple. It was agreed that the rupee is vulnerable to attack and it’s better to be devalued. In order to devalue the currency, instead of actual operations where you might get locked in, you sort of express your feeling which is like telling the market “you better note” and telling it what behaviour is expected. This was new in our country at that point of time. In principle it was decided between the RBI and the government that a little devaluation of the rupee is desirable. How to do that is an operational matter that was left to the RBI.
We discussed in RBI and Rangarajan (then Governor) said it’s a good opportunity and generally in those days when we accepted speeches and selected the subject, it was contextual with a message involved. This (Goa meeting) was a good opportunity to tell dealers, and in the forex market, major part of the transactions take place through foreign banks. They’re quite sensitive to central bank communications and this was the first time we were coming out with this method to influence the outcome.
When we prepared the speech, I still remember, Rangarajan went through it so carefully that at one place he insisted on inserting the word “end”. He said that otherwise if they take one sentence in the press, it can be incomplete. What happened was that though it was intended, the government felt that the fall was too rapid.
The point is that such movements always overshoot and it is better that we have such expectations of depreciation behind rather than ahead. This is like a surgical operation, as they would call it now. We at the RBI felt that it was better to let it (depreciation of rupee) overshoot, solve the issue quickly so that the currency will come back. The government felt that such a rapid depreciation will be disruptive on quite a few balance sheets. Finally, we had to concede to the judgement of the government.
But isn’t influencing the market with statements risky as the effect can be disproportionate to intentions? Your experience with the Goa speech and of course, the “taper” comment of Bernanke are good examples.
But why do you think that market operations will be any different. In fact, the effect will be less. In market operations you’ll be putting your money also, here you’re only putting your mouth! In the former case, once you start, you’ll have to decide on where to stop. There’s no such locking in here. You’re first nudging them with the weapon of suasion and then the choice to intervene is always there. If you start with intervention, the option of suasion is gone.
But in the end if you’re forced to intervene in the opposite direction, as it happened in the Goa speech aftermath, what will be the sanctity attached to future attempts of the RBI to influence the market one way or the other? Will the market take you seriously?
I must tell you that after Goa, there were at least two occasions where I also engineered questions to be raised at me!
Why don’t you tell us about it?
There was a feeling that there was excessive enthusiasm in the debt markets. So I told my executive assistant, “ I hope someone asks this question in the media conference”. He used his network and suggested to someone that this question be asked, and it was. I replied and interestingly, this was first time we were attempting this in the debt market.
I think I said something like “in our view the debt markets are excessively enthusiastic but we’re confident that the markets are analysing these…” And then some foreign institutions took positions ignoring our signal. They ended up booking heavy losses. Their bosses later called on us and said “Sir, we told the fellows here that this is a clear central bank signal which is quite common in Europe. But they said no, it’s not like that in India.” Those that recognised the signal learnt. It’s good for everybody to know the signals.
What are your thoughts on the current regime of flexible inflation targeting? Is it something that suits our economy at this point in time?
Let’s first look at lessons from the globe and then our own history. Globally, before the crisis, everyone said inflation targeting is good, do it. But after the crisis, they introduced the concept of flexible inflation targeting. In our case, our inflation performance is creditable compared to other emerging market economies over the last 30-40 years.
So it’s not as if we were indisciplined and required inflation targeting to influence expectations at that point in time. But still, it was sometimes very high and volatile. So the idea that inflation expectations should be contained was accepted. Inflation targeting was also accepted but it was not rigid. That’s why I called it self imposed inflation targeting. So when I was Governor, when there was no requirement for mandatory inflation targeting, I said, I’m imposing it on myself to influence expectations.
Now it has been formalised and flexibility has been introduced in terms of the range. So, I cannot oppose the idea that there has to be some kind of a target. But at that point of time, I had some discomfort that the RBI might not be able to deliver if it commits. Relative to the government, the role of the RBI is less in influencing the price level. So the issue was whether RBI can deliver. I cannot be against the principle now having initiated it when there was no law. Exactly the same thing with MPC.
Though I had to decide on my own I said that I’ll have a Technical Advisory Committee to advise me on monetary policy because the committee way of looking at things is different. It was a committee of understanding, different from a committee of deciding. The MPC is a committee that decides, not one that advises. The committee approach I cannot question but committee responsibility and that being centre to the working of the RBI is where I had some questions because in our conditions can RBI use monetary policy independently of other operations?
Also let us accept the independence of the central bank or independent monetary policy is not something that is ingrained in central banking. It is something that came up in the 70s. Both the global order and the monetary policy has produced little more volatility than growth from the eighties. My limited point is that it should be contextual. In one case I also argued whether we want an independent monetary authority or do we want an institution which does everything as a full service central bank? The issue now is whether the governor is responsible only for inflation. But the governor of the RBI is responsible for many things and so if he delivers on inflation and muffs up everything else, are we happy?
Shouldn’t there be more diversity in the composition of the MPC with representatives from industry and banks?
It is a question of what you’re looking for from the policy. If you see the RBI board, technically, till the MPC was appointed, it was in charge of the governance. The RBI was to be run under the overall supervision of the Board. The governor exercises concurrent powers with the board, not overriding powers. And the Board represented society, economy and money & finance.
But if you’ve decided one instrument, one target, then it is narrow. For a narrow remit, you can have a narrow technical expertise. At the moment there is lack of clarity because the RBI Act now superimposes the MPC over the RBI.
What’s it about the RBI that makes whoever occupies the governor’s chair, even a bureaucrat, fiercely independent?
Two things. In general, I think you know that where you stand depends on where you sit. The total number of about 40 economists who have gone to Ivy League schools in the RBI is a multiple of the total number of economists in government. Therefore, when you have to depend on professional advice, the amount available in the RBI is impressive.
In recent times, the government has tried to outsource but the problem is that most of them are aligned with financial markets and therefore their public policy approach is different. The RBI’s pre-eminent position in policymaking is because the professional advice available at the disposal of the governor is multiple that available in government.
Finally, who do you think will make a good governor, a bureaucrat or an independent professional?
…….. But I’ll say that exposure and understanding of the system is useful.
Take Rangarajan, Bimal Jalan and Manmohan Singh. Do you call them specialists or administrators? One unique feature of the RBI in the recent past is the continuity in the Deputy Governor dealing with monetary policy. There were only four DGs for 25 years. In the early eighties, for almost 10 years it was Rangarajan, followed by SS Tarapore for five years, myself for 6 years and then Rakesh Mohan for four years. And it was a mix. Rangarajan was an academic, Tarapore a thoroughbred central banker who rose from the ranks of the RBI, followed by me, a bureaucrat, and then Rakesh Mohan, an urban economist. How many central banks can boast of such stability and continuity?
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