TIede sign of re capital is at ion process is critical for any economy. Knowing the importance of this process well, government of India is already in the process of exploring more options in this regard, said Dr. Y.V.Reddy, FormerGovernor, Reserve Bank of India, while delivering the 20th JRD Tata Memorial Lecture.
While speaking on "Future of Central Banking in India", Dr. Reddy said 'Many argue that RBI is the creation of the government and accountable to government. Hence, too much of independence cannot bejustified. There is a basic philosophy behind the arrangement of central bank to be the guardian of money and finance. The idea isto convincepeople that they can have trust in money and finance irrespective of political changes since an independent institution, namely, central • bank, has been entrusted with such matters.
Further, the government has spending authority and, therefore, it wants to convincepeople that creating money is being handled by another institution. In other words, a central bank is an institution created by the government for its 0wn purposes.
The government would like to convince people that central banking is independent but would like the central bank to do what it wants. Central bank has to convince the people that it is independent if it wants to be effective.
For most of the 1980s, there was a quantum jump in growth, thanks to early industrial and trade Iiberalizetionmeasures and some financial market reforms. RBI became concerned with higher fiscal deficits and large borrowing programme financed through monetization. Towards the end of the 1980s, short term external financing also increased. ThecollapseoftheUSSRadded to the imbalance in external sector.
RBInegotiated the transitionof rupeetradeagreementwithRussia.
Added to political uncertainties, the Gulf crisis triggered high oil prices further tightening the balance of payments situation. NRI deposits and remittances were adversely affected.
RBI repeatedly w"arned the government about the possible crisis because of large deficits in fiscal and external sectors. The political instability during this period of domestic vulnerabilities coupled with gulf crisis led to the balance of payments crisis in early 1991.
The RBIsuccessfully avoided hyper inflation and also ensured that banking system retained the confidenceof the people at large. Part of the credit should go to Government because the political pressures in a functioning democracy helped contain inflation. Further, public sector banking itself provided the necessary comfort to people at large. The balance of payments was on a different footing. RBI conveyed its concerns as the situation was deteriorating and warned the Government of impending payments crisis.
The RBIbecame the first line of defence as the stress in balance of payments became acute in 1991. However, management of a full-blown crisis required the total involvement of the government. Despite political uncertainties, the government took the advice of the RBIand strongly supported its emergency actions in both financial and external sectors, said Dr. Reddy.
It culminated in using gold belonging to the government and pledging the gold belonging to the RBI to save the country from loss of reputation and defaulting from meeting external payments. Negotiations with the International Monetary Fund were held in order to obtain the support in climate of political uncertainty. The RBI and the Government drew upon their professional skills and clout both within and outside the country to device strategies and actions. The apolitical stature of RBIwon the support of the full spectrum of political leadership.
There is a basic philosophy behind the arrangement of central bank to be the guardian of money and finance. The idea is to convince people that they can have trust in money and finance irrespective of political changes since an independent institution, namely, central bank, has been entrusted with such matters.
Or. Y. V Reddy, Former Governor, Reserve Bank of India addressing the audience. Mr. Sandeep Jajodia, President, ASSOCHAM welcoming Or. Y. V Reddy, Former Governor, Reserve Bank of India.
Dr. Y V Reddy, Former Governor, Reserve Bank of India releasing the Special Commemorative Publication on IR.D. Tata along with Mr. Sandeep Jajodia, President and Mr. D. S. Rawat, Secretary General, ASSOCHAM.