At a time when the central bank is going through a strained relationship with the government over its independence and autonomy, Reserve Bank of India (RBI) Governor Duvvuri Subbarao praised the efforts of his predecessor, Yaga Venugopal Reddy, for maintaining the central bank’s autonomy.
Reddy, however, said he’d been allowed to act independently by the government. They were speaking at an event to launch a book, Global Crisis, Recession and Uneven Recovery, authored by Reddy.
While discussing the importance of autonomy, especially with regard to financial stability after the financial crisis, Subbarao said before the crisis there was an element of doubt whether the central bank should have the sole responsibility of financial stability. Such doubts, after the crisis, are not there in the governor’s mind.
“Once Dr Reddy famously said central banks are autonomous by the space defined by the government. So, what that means is that the central bank has autonomy for monetary policy, for regulation but probably does not have the complete authority in managing financial stability,” Subbarao said.
One may recall, in the February budget, the government proposed setting up a Financial Stability and Development Council (FSDC). RBI, however, opposed the discussion paper of the proposed FSDC structure and objective.
“By far the strongest argument in favour of entrusting the financial stability responsibility to the central bank is that it is unquestionably the lender of last resort for the financial system,” Subbarao said in the past. RBI had opposed the proposal to set up a joint committee headed by the finance minister to decide on inter-regulatory disputes over hybrid products.
In a lighter vein, Subbarao narrated an incident experienced by a common friend of both, when he (the friend) was sitting with Reddy during his tenure as governor. “There was a common friend, of Dr Reddy’s and mine, who was sitting with him when he was governor. Dr Reddy was on the phone and the friend was privy to one side of the conversation which went like this: No, No, No, No, No, Yes, No, No,” he said.
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“At the end of the conversation, the friend asked him what it was all about. He (Reddy) said the finance minister was asking to do all kinds of things. So, I was saying no. He (common friend) then said, what was the Yes about? He said the finance minister asked me if I was able to hear him,” Subbarao said, bringing the house down.
However, the former governor was all praise for the government and said it gave freedom to the central bank.