Reddy also said that the problem of black money cannot be eliminated through demonetisation alone.
Y.V. Reddy. Credit: Reuters
New Delhi: Former RBI governor Y.V. Reddy today said that the central bank is facing a reputational risk and its identity as an institution has been damaged.
Reddy also opined that the problem of black money cannot be eliminated only by destroying cash through demonetisation.
“There is a confusion (about the role of RBI) at philosophical level. There are two types of confusions. To be very frank, my own frustration is that the institutional identity of RBI has been damaged,” Reddy said in an interview to CNBC TV18.
Reddy, who served the RBI for 11 years as deputy governor and governor, regretted that central bank is being treated as just a regulator although regulation is only one of its functions.
“The RBI is a monetary authority. Yes but it is full service central bank … It was in-charge of many other things. The recent emphasis appeared as though the monetary policy is the main function. Governor is accountable to monetary policy. Then he is not accountable to regulation, he is accountable for currency coins.”
“There is confusion about the relative importance. The relative importance is being decided outside more than…,” he added.
Noting that the procedure applicable for a regulator has to be different from the monetary authority or central bank, Reddy said, “For central bank, regulation is just one function and to say that head of an institution who performs eight functions and one function is regulation is equal to other regulator. I think there is some lack of clarity.”
Expressing concern over comments against the RBI by international agencies like S&P, he said, “For central bank reputational risk is [the] worst risk, credibility is the worst risk. If this is happening in [the] international opinion I would say this is a national problem now.” He also called for national debate cutting across party line on the autonomy central bank. “I think its the time there should be a debate at this juncture, given the type of comments internationally, cutting across parties that what should be the nature of the central bank and how it should be run,” he said.
Comparing the RBI to the army, Reddy said that financial and monetary security of the country rest with the central bank. He also suggested that financial stability function should have been with a non-political set-up like the RBI governor.”[In] most emerging economy financial instability, political instability happen simultaneously,” he said.
Asked whether the position of RBI governor has been devalued, he said, “Definitely there is a problem especially after legal amendments, the way governor is selected, the way deputy governor is selected.”