The Conscience Keeper Of Monetary Virtue

Updated: Jul 31 2002, 05:30am hrs
As an economist from the Indian Administrative Service, Dr Y V Reddy was in many ways an enigma in that he innately had the mind of a central banking economist. Upon his appointment as deputy governor of the Reserve Bank of India in September 1996, he entered the central bank as a true believer in its mission and he toiled for six hard years to preserve and better central banking values. How would Dr Reddys contribution be assessed This had best be remitted to history, but what is attempted is a cameo of the past six years.

Without being immodest, the present columnist can claim some awareness of the challenges which Dr Reddy faced. The RBIs strength, and perhaps its weakness, was the strong fortress walls that each department had. Without damaging the cohesiveness within departments, Dr Reddy established strong inter-departmental co-ordination he introduced an open system of committee work wherein a wide range of persons outside the bank were brought into the consultative process. Take, for example, the Technical Advisory Committee on Securities and Money Markets. This approach was later on significantly widened when a large number of Advisory Groups were set up on International Standards and Codes. The monumental works undertaken under Dr Reddys guidance by all these groups rank as outstanding contributions in an international comparison.

It was Dr Reddys unique ability to listen to others and to use this knowledge, by proper sieving, to build outstanding edifices in many areas of policy. His approach was not only to ask the right questions but to pursue them with the breadth and depth of his scholarship. He had a penchant for communicating to the outside world and he took upon himself the role of a peripatetic interpreter preaching the central banks faith. Early on in his stint, there was the media sensation of his Goa Speech on exchange rate policy. A lesser mortal would have been daunted by the criticism hurled at him both, within and outside official circles.

His crime was to boldly state that the rupee was overvalued and people were aghast at his apostasy. While the immediate reaction was unfavourable, it is now increasingly recognised that it was Dr Reddy who in many ways saved India from the fate of other East Asian countries. The rupee exchange rate was depreciated from a position of strength rather than being forced to by the market when weaknesses became more apparent. Dr Reddy was burnt at the stakes, yet his bold action assured him sainthood. Gold is yet another area where Dr Reddy was in the avant garde of policy change. I never tire of reiterating that it was Dr Reddy, and not the Committee on Capital Account Convertibility, which deserves credit for the major changes in gold policy.

As against a gross market borrowing of the Centre of Rs 40,000 crore in 1995-96, the current financial year envisages a borrowing of over Rs 1,40,000 crore. It is, indeed, surprising that not only is such a large borrowing programme being successfully completed, but at significantly lower interest rates. Dr Reddy can legitimately take credit for being the focal point of the internal debt management team which successfully managed this Herculean task. Surely, Dr Reddy can doff his cap with great satisfaction for attaining Mission Impossible. Much of the success of the RBI can be attributed to the assiduous build-up of market structures to which Dr Reddy gave great attention.

Its true that in the area of monetary policy, he did not see the final attainment of his goals. For example, a cash reserve ratio of 3 per cent. But having brought it down to 5 per cent, he has left a less difficult task to his successor. While one may not agree with some of the monetary policy measures, one cannot help admiring the dexterity with which they were put through.

Underlying Dr Reddys philosophy on central banking was the need to have a strong balance sheet, and during his tenure he assiduously built up the RBIs internal reserves. It is well-known that a balance sheet hit is something any central bank should be prepared for and, when such an eventuality arises, no one can bail it out. Dr Reddy saw in a strong balance sheet for the RBI an assurance for its pristine monetary virtue and he used this as a lodestar for appropriate policies. He can no doubt take credit for the phasing out of ad hoc treasury bills and for providing the key inputs into the Fiscal Responsibility and Budget Management Bill. Issues of market risks relating to government paper and implications of government guarantees were of great concern to Dr Reddy and these issues will necessarily remain part of the unfinished agenda.

Despite all his preoccupations, Dr Reddy gave close attention to RBI publications. It is to his credit that today the Annual Report, the Trend and Progress of Banking, and the Currency and Finance Report vie with each other in terms of excellence and timeliness.

Dr Reddy was not without faults. His greatest fault was a soft heart which would forgive and even nurture those who deliberately hurt to wound a quality he could have done well without. But his innate nature would not allow otherwise. It would appear that he was born with a moral compass and driven by an altruistic concern for the greater good.

Each departing official has his own style of saying farewell. Dr Reddy is in a sense unique. A few days ago his latest book was released: Lectures on Economic and Financial Sector Reforms in India, Oxford University Press (2002). It covers discourses on autonomy of central banks, choice between single and multiple regulators, debt markets, capital account convertibility, international standards and codes, fiscal issues and public policy. The lectures carry Dr Reddys inimitable style of debate, dissent and progress and it is a book no serious student of economics can afford to ignore. To his colleagues in the RBI and the financial community, there could be no better parting gift. While his departure is indeed a loss to the RBI, it is gratifying to know that Dr Reddy would be moving to the international arena to continue to serve the country. As he leaves the portals of the RBI today, Dr Reddy must know that the Indian central bank is a very possessive organisation and irrespective of all the laurels he may attain in the future, he will always belong to it.