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Looking at the stewardship of Yaga Venugopal Reddy of the
RBI, which he demitted on September 5, 2008, after the completion
of his five-year term as Governor, one wonders if he has
literally taken Baron Alexandre Lamfalussy's answer as the
dictum for his practice. With the gift of a rare `foresight'
Reddy—anticipating the impact of the huge capital inflows
that the country has been witnessing right from 2004 on
the dynamics of credit and asset cycle in the country and
smelling that the credit cycle, which is at its peak, in
association with high growth in economy, is simmering with
inflationary pressures—took an anti-inflationary posture
right from 2004. He, perhaps, with a concern for the increasing
cyclical strength and the need for early move against inflation,
hiked rates right from late 2004 onwards; when he became
Governor, the CRR was 4.5%, which at the time of his retirement
stood at 9%. And, intriguingly, he did not cut the interest
rate during his tenure, on the other hand, during the last
five months he raised it by 125 basis points to gradually
tighten liquidity in the market. Perhaps, believing strongly
that `easy money policy' leads to high interest rates over
time, he repeatedly and, of course, bravely and more rightly,
resisted the pressures for lower interest rates. Despite
his steadfast approach to managing inflation, it raised
from less than 4% as at the time of his taking the reins
of the RBI to an historical high of 12%—all in the
last six months. This compels one to admit that his independent
approach to management of price stability has ensured a
`non-inflationary continuous expansion' in the country for
a considerably long time.
His handling of exchange rate, in the context of unprecedented growth rate that the country has witnessed and the resulting increased inflow of forex, is equally commendable. He contained real appreciation of rupee by ardently practicing sterilized forex intervention through sale of government securities, through liquidity adjustment facilities, intermittent rise in CRR, imposing restrictions on ECBs and inflow of capital through the participatory notes with concomitant well calibrated liberalization of capital outflows. It is this containment of real appreciation of rupee—except for a short while—that has helped exports grow rapidly. Equally, it is, perhaps, this resistance of the RBI, particularly during his first three years of stewardship, against appreciation of rupee that made India an attractive investment destination. |
