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HindustanTimes Mon,22 Dec 2014

It’s not govt vs RBI, but a difference of opinion: Reddy

Gaurav Choudhury, Hindustan Times  New Delhi, January 29, 2013
First Published: 23:02 IST(29/1/2013) | Last Updated: 23:05 IST(29/1/2013)

Former Reserve Bank of India (RBI) governor YV Reddy has cautioned against jumping to conclusions about a perceived tiff between the Reserve Bank of India (RBI) and the government, merely on the basis of differences of opinion between India’s top financial and monetary administrators.

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“There are different perspectives. Just because there are differences of opinion, it does not mean that either of them is right or wrong. Nor does it mean there is no coordination either. There are institutional dynamics and one should not jump to conclusions,” Reddy told HT in an exclusive interview on Tuesday.

Reddy’s new book ‘Economic Policies and India’s Reform Agenda: NEW THINKING’, deals extensively on the broader issues of macroeconomic modelling and the need for the academic debate to move out of compartmentalised analyses.

“As a general debate there is no point in the central bank always agreeing with government. If it agrees with the government on everything, then it is superfluous. If it consistently disagrees, it is obnoxious. It is not a sub-ordinate office. But there should be creative discussion,” he said.

The RBI, which on Tuesday cut its key lending rate by 0.25% points after withstanding mounting pressure from the government and industry bodies to cut interest rates for nine months, had evoked unusually firm comments from the government’s macro managers, who had hit out at the central bank’s hawkish policy stance perhaps mirroring growing difference between India’s two topmost financial administrators.

“Within the discipline of economics, thinking in silos should be given up. The hitherto neglected areas such as behavioural economics, institutional and information economics, imperfect knowledge economics should be brought into the mainstream and integrated,” Reddy said.

The former RBI governor, who has been recently appointed as the chairman of the 14th Finance Commission, also questioned the orthodox economic thinking that developing countries do benefit by attracting foreign savings to supplement domestic savings

“The relevant issues to be considered by the policymakers, particularly in countries like India, may be the following. Larger current account deficits may make cost of external debt higher for all. Also, the incurring of foreign liabilities beyond what is needed for financing of current account deficits could have a potential for currency and maturity mismatches — often a source of vulnerability,” Reddy said.

India’s current account deficit — the the difference between export earnings and import expenses net of cash payments and remittances — has hit a record high of 5.4% of GDP during the July-September quarter, prompting the government to take steps such curbing gold imports by imposing a higher customs duty.


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