Reserve Bank of India (RBI) deputy governor Shyamala Gopinath retired on Monday after 39 years of service at the central bank. In an interview with Parnika Sokhi and Manojit Saha, she talks about the journey. Edited excerpts:
You were one of the longest serving deputy governors. How was the journey?
I had the opportunity to deal with several aspects of RBI's functions. Central banking is handled differently in different countries. Some of them are monetary authorities, while some have multiple roles, like we do. The very diversity of RBI's roles provides a huge opportunity. At the same time, there is a kind of a linkage. I was on the regulation side, and then on the market area. It gives a good sense on how you regulate the market.
You have seen several upturns and downturns, the recent one being in 2008. What is your suggestion to future central bankers?
The main lesson is not to be afraid of taking any action. If we feel there are certain conditions in the market which could lead to problems, one should be able take certain unpopular steps.
In the financial stability report released last week, RBI expressed concern on the ability of Indian firms to refinance foreign currency convertible bonds (FCCBs). What led to the concern?
We have flagged the issue for a couple of reasons. One is FCCBs were seen as a wonder instrument for all corporates. Companies were able to raise almost zero interest funds, since they were sure they would convert them (FCCBs) into equity. Such was the surety that they made any provision, even for a possible interest liability. So, if the FCCB is redeemed, they have to pay.
We don't think there would be any problem in meeting all the obligations. RBI had earlier enabled companies to refinance FCCBs through extra commercial borrowings. We are in discussions with the government to explore the possibility of making it easier for companies to either refinance or buy back.
So, would there be some leeway for them to tide over the problem?
Yes. But, ultimately, this problem has to be sorted out by the companies. Very often, companies say since the FCCB would be converted into equity, RBI should not have any regulation that applies to debt to be made applicable to an FCCB. However, it is clear now that our policy to treat FCCBs as debt upfront turned out to be the right approach.
Why did RBI change its stance regarding financial stability?
Even when the proposal was mooted, we never said there should not be any co-ordination mechanism. We felt the autonomy of the regulator should be maintained and the role of the central bank in maintaining macro stability and systemic stability should be recognised. During a crisis, if there is a liquidity concern, the central bank has to be there. But if it is a solvency issue, the government has to be there. In that sense, in the time of a crisis, the government has a role and that is what we have recognised.
But RBI still opposes the separation of the debt management office (DMO) from the central bank.
The government is aware of our views and it is for the government to ultimately take a view. But one has to be a little cautious in thinking that a separate DMO would minimise costs, since this cost minimisation can only happen with more risk. Some independent DMOs, which were present in Greece and in Portugal ended up in real crisis. We know what followed then.
What were RBI's apprehensions regarding foreign direct investment (FDI) in proprietary trading?
We need to understand why we need FDI in proprietary trading. What is proprietary trading? You bring in money and you speculate on it. They would bring in certain equity and then borrow from the Indian market and then trade on that. They are no different from hedge funds.
What is your unfinished work at RBI?
I would have liked to see some of it happen before I left the central bank. For example, we introduced the core banking solution for the central bank and we are looking for a new state-of-the-art depository for government bonds. That will happen next year. Credit default swaps (CDS) and interest rate futures are also there. We are looking at resolution of some of the issues. We have some suggestions. So, to take that forward, I hope banks start writing CDS by October-November.
After retirement, Usha Thorat is still associated with the central bank in some form. Would you also like to be around?
I would like to be in the financial sector, by contributing to public policies. However, as of now, I don't have anything on the cards.
