Reddy’s Remedies

It is easy to see why central bank governors are not exactly popular figures in their country. Every time there is, say, a housing bubble or an inflationary trend, it is the central bank that invites the wrath of the public. Every time price control measures are taken, stock markets swing upside down as investors and companies alike vent their ire on the central bank. The top job of central banking is, clearly, not for the faint-hearted.

RBI governors in the past would probably agree that uneasy lies the head that wears the crown. To handle the top job of central banking in India is no child’s play. Admittedly, there are incentives like fame, international recognition and prestige. But on the flip side, it is the RBI governor who often becomes the government’s favourite flogging horse in case money matters in the country go awry. The RBI governor has to constantly wage a battle with the upper echelons of power in the country to achieve that precarious balance between growth and price stability. He also has to contend with a meddlesome Finance Ministry that is solely concerned with GDP figures in the country. And then there is the government itself to deal with, which goes all out to appease voters with no concern for responsible budgetary management.

As Yaga Venugopal Reddy bids farewell to the hot seat of RBI, it is time for critics to analyze and deconstruct his five-year term as the RBI governor, which spanned over some of the best and worst times for the Indian economy. When Reddy began his tenure as the RBI governor, Indian economy was in the proverbial pink of health, with a steady growth rate, low inflation and over $85 billion of foreign exchange reserves. He introduced a plethora of reforms to upgrade the country’s banking sector. However, Reddy has earned criticism for his rather secretive approach regarding the country’s monetary policy, and his policy measures came to be famously known as “Reddy’s Riddles”.

Right at the beginning of his tenure, Reddy earmarked continuity with change as the cornerstone of his policies. He largely followed an interventionist approach, and was ready to take tough decisions on monetary issues like that of capital inflows via participatory notes. Occasionally, he did run into troubled waters as he tried to ensure the autonomy of the RBI. With an adamant Finance Ministry that simply refused to compromise on growth rates, the governor had a tough time trying to tackle inflationary forces.

In the long term, though, Reddy managed to ensure that liquidity-mopping measures were undertaken by regularly hiking repo rates and the cash reserve ratio. It is Reddy’s sound handling of the global economic turmoil in recent months that brought out his finesse as an economist. When global superpowers were teetering at the brink of recession, and housing slumps and collapsing banks became the talk of the town, the Indian economy remained relatively stable and unharmed. Thanks to Reddy’s tight monetary policies, the major thrust of the global turbulence was not felt by the common man.

All eyes now rest on D Subbarao, and questions are already being raised over whether he can recreate Reddy’s magic. Even Reddy’s staunchest critics admit that his solid dependability is hard to replicate. Reddy’s remedies cruised the country through an interesting but challenging era. As Subbarao’s autograph begins to appear on currency notes, it remains to be seen if he can handle the top job of banking in the country.

Namrata Singh

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