Former Reserve Bank of India Governor YV Reddy on Monday said that the central bank is facing a 'reputational' risk and its identity as an institution has been damaged. He also opined that the problem of black money cannot be eliminated only by destroying cash through demonetisation.
"There is a confusion (about the role of RBI) at philosophical level. There are two types of confusion. To be very frank, my own frustration is that the institutional identity of RBI has been damaged," Reddy said in an interview to business news channel CNBC-TV18.
Reddy, who served at the RBI for 11 years as deputy governor and governor, regretted the fact that the central bank is being treated just as a regulator although regulation is only one of the functions of the central bank.
The RBI is a monetary authority. Yes but it is full service central bank ... It was in charge of many other things. The recent emphasis appeared as though the monetary policy is the main function. Governor is accountable to monetary policy. Then he is not accountable to regulation, he is accountable for currency coins. There is confusion about the relative importance.YV Reddy, Former Governor, RBI
Noting that the procedure applicable for a regulator has to be different from the monetary authority or central bank, he said, "For the central bank, regulation is just one function and to say that the head of an institution who performs eight functions and one function is regulation is equal to (an)other regulator, I think there is some lack of clarity." Expressing concern over comments against RBI by international agencies like S&P, Reddy said, "for a central bank, reputational risk is the worst risk, credibility is the worst risk. If this is happening in international opinion, I would say this is a national problem now."
He also called for a national debate cutting across party lines on the autonomy of the central bank.
"I think it's the time there should be a debate at this juncture, given the type of comments internationally, cutting across parties that what should be the nature of the central bank and how it should be run," he said.
Comparing RBI with the army, Reddy said that financial and monetary security of the country rest with RBI. He also suggested that financial stability function should have been with a non-political set-up like the RBI governor.
On demonetisation, Reddy said, "the black money problem cannot be solved by destroying cash. It is a bigger problem."
Asked whether the position of the RBI governor has been devalued, he said, "definitely there is a problem especially after legal amendments, the way governor is selected, the way deputy governor is selected.
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