The Monk In The Monetary Monastery

Updated: Sep 17 2003, 05:30am hrs
The change of guard ceremony at the Reserve Bank of India on September 6, 2003, was, for the first time, in full glare of the media. Of course, every pappu is telling governor YV Reddy what he should do on interest rates, reserve ratios, forex reserves management and regulation-supervision. There are analysts dissecting Dr Reddys speeches as deputy governor so that they can hold him for action now that he is governor. All this is otiose. Conditions do not remain static, so there is no point holding Dr Reddy to his word!

The job of the governor is a punishing one. As Manmohan Singh, a former governor said, the governors job is perhaps the loneliest one in the official Indian firmament. Life in the monetary monastery is hard, especially for the governor. Dr Reddy spent six hard years as deputy governor and knowingly he has given up sybaritic years in Washington to toil as a monk. To understand why anyone would do this, one has to appreciate the personality of Dr Reddy.

This is not the first time Dr Reddy has responded heroically to the call of national duty, and this would also not be his last sacrifice. Notwithstanding all the denigration, questioning his physical endurance, it is not known that on innumerable occasions after a long flight, Dr Reddy would immediately delve into work defying jet lags. Dr Reddy has an innate moral compass which requires him to be generous even to those who are notoriously irascible, and he has a kind word even for those who hurt with the intent to wound.

Dr Reddys trump card is his communication skills, both within the RBI and outside, while dealing with various economic agents. Candour has always been his lodestar and in handling difficult issues, he goes back to fundamentals and uses his listening capacity and patience to understand issues before making up his mind.

While continuity with change will no doubt be his watchword, governor Reddy knows that the economic environment cannot but change and he, therefore, necessarily has to adapt policies to the changing needs.

Governor Reddy is too much of a veteran to believe that the RBI has entered into Paradise, and he knows only too well that he has the onerous task of taking away the punch bowl well before the party gets swinging.

To be able to undertake a reasoned and fair assessment of governor Reddys initiatives in the immediate ensuing period, it is necessary to appreciate the dilemmas facing him.

As a signatory to the 1997 Supplemental Agreement between the government and the RBI, and as a co-author of the vital Report of Fiscal Responsibility which triggered the Bill which was eventually passed by Parliament, albeit in a modified form, Dr Reddy appreciates that without fiscal rectitude the country has no hope. He is too seasoned to believe that just because in the recent years the borrowing programme has sailed through effortlessly, it would continue to do so in the future.

Governor Reddy, more than anyone else, comprehends the fallout of a bond market bubble. Even if the current stance of soft interest rates were to continue, Dr Reddy would know that interest rates cannot move indefinitely in a unidirectional manner and his primary concern would be to ensure that economic agents develop resilience to deal with two-way movements in interest rates. It is here that thought would need to be given to the capacity of different economic agents to withstand market shocks. This is not an easy task as it is closely intertwined with the fiscal deficit and the externally generated domestic liquidity.

Dr Reddy realises that he cannot directly affect the size of the fiscal deficit, other than through moral suasion, but he can play a crucial role in its composition, and it is here that the renowned skills of the RBIs internal debt management policy would be tested.

On the forex front, Dr Reddy would be well aware of how changes in the international economy could effect the movement of forex reserves. Moreover, he would be well aware that money is fungible and that there is a need to give careful attention to intrinsic interest rates i.e., nominal interest rates adjusted for the forward premium/discount. Just as money is fungible, the various types of current and capital flows can commingle and appropriate policy action is dependent on a proper assessment of these flows.

In the area of banks/non-banks and exchange control, Dr Reddy, from his past experience at the Regulation Review Authority, would know the problems emanating from the complexity of regulation, and he is a votary of a clear and transparent regulatory framework. A necessary concomitant of a light regulatory system would need to be a strong supervisory system which would punish infringements in full public glare.

Internal reform in the RBI is an area which would be of concern to Dr Reddy as the RBI cannot insist on toning up the internal working of banks and institutions without doing likewise within the RBI. In a rapidly changing environment, the RBI has to continuously upgrade its technical skills. There is a visible need for lateral injection of skills in forex, money and securities, regulation and supervision as also the specialised departments. Again, changes in recruitment policies that have been initiated in recent years have to be persevered with. The RBI, as a unique and premier institution in the financial sector, has to be in a class of its own as far as remuneration and facilities are concerned, and in these areas it has to be totally autonomous from influences from its borrower viz., the government.

The RBI has been very fortunate in that it has all along had seasoned governors. The denizens of India owe the government a great sense of gratitude for the decision to appoint Dr Reddy as governor RBI. One has no hesitation in saying that while expectations are high, Dr Reddy would more than fulfill these expectations. He has a difficult mission, but may God hold this monk in the palm of his hand.