Advice and Dissent Author: Y.V. Reddy (Book Review by : Andrew Cornford)

Early Career

YVR’s early family life – education, the experience of independence, and daily life growing up in a world in which things we take for granted like tooth brushes were very costly – is admirably described. He seemed headed happily for a career of university teaching and research. But his father wanted something for him with solider long-term prospects, and according to YVR believed that his son’s entry into the Indian Administrative Service (IAS) was preordained. Once the first hurdle of the entry examination was behind him, formal training began. This included predictably the Indian Constitution, public administration, basic economics and the Indian economy, and less predictably horse riding since the work of an IAS officer could involve visiting remote, inaccessible areas – a skill which to YVR’s relief was not in fact required in his subsequent career.

YVR’s account of the final two years of his training, which entailed immersion in all levels of village and district administration, is revealing for an understanding of his subsequent career. Activities included in his responsibilities during this period comprised agriculture, irrigation, animal husbandry, health, family planning, women welfare, social welfare, veterinary care, child care, loans to farmers, and rural roads. Early years as an IAS officer also exposed Reddy to President’s Rule in Hyderabad in his role of liaison officer between the government of Andhra Pradesh and the army. Together with some friends YVR started a study centre with the mission of providing coaching for civil services examinations for the inhabitants of rural areas. Such a varied exposure to different administrative problems and different categories of people no doubt contributed to the problem-solving pragmatism which YVR brought to bear on problems in later senior monetary and financial positions in the Indian government.

Climbing the Policy Ladder

With the imposition of Indira Gandhi’s State of Emergency in June 1975, like other IAS officers, YVR was faced with the uncomfortable task of reconciling belief in administrative autonomy and basic freedoms with continuing to carry out one’s duties in conditions where some of the goals behind the new measures were good but oversight and accountability in the usual sense disappeared. Reddy considers himself lucky that in Andhra Pradesh officials were buffered from the excesses of the State of Emergency by the leadership of the chief minister, Vengal Rao – leadership which probably explained that only in Andhra Pradesh did Indira Gandhi avoid state-wide defeat in the first election after the end of the emergency. Earlier in 1975 YVR had received his doctorate from Osmania University and begun a parallel life of extensive contacts with academic figures and authorship of articles in academic journals, initially mainly about economic planning.

In April 1977 YVR was moved to the Department of Economic Affairs in Delhi where he was assigned to the IMF and World Bank desk, and from here after only a little over a year he moved to Washington to the job of technical assistant to the Indian executive director of the World Bank, a post which provided him with insights into the politics of World Bank lending and conditionalities. In his next posting back in India he worked for the colourful chief minister of Andhra Pradesh, N.T.Rama Rao (NTR), formerly a popular top-rated film star. When YVR told Anne Hamilton, chief of the World Bank’s India Division, of his impending departure, she kidded him that he was going to work for a popular hero. YVR replied, “In America you elected a B-class hero of B-class movies. In Andhra Pradesh, we have elected an A-class hero of A-class movies”.

This was to be a turbulent period in YVR’s life. NTR had swept the Andhra Pradesh election in 1983 thanks to his image as an actor, his willingness to abandon the rich and glamorous life which he had enjoyed, his oratory, and his innovative electioneering. YVR often found himself in the middle of conflicts between NTR’s government and that of the centre over matters such as the funding of new as opposed to ongoing schemes. Despite unavoidable reservations YVR acknowledges that NTR’s government had some considerable achievements in areas like reform of political structures and the computerisation of government operations, the latter of which was to prove the foundation of Andhra Pradesh’s leading position in India’s e-governance – thanks to an initiative “led by a man who dressed in saffron robes and talked like he was Lord Krishna fighting against the ancient evils of the world”. But unsurprisingly working for NTR was eventually a draining experience, and YVR was relieved when after NTR’s electoral defeat in 1989 he was called to the finance ministry in Delhi.

1985-1990 served as the period during which thanks to periods of academic leave YVR began a thorough rethinking of his views on the respective roles of state and the market in the economy. Such rethinking had also since the 1970s been a feature of much writing of the intellectual and political élite in many other countries, especially Britain and the United States. First-hand experience of the results of over-reliance on planning had disillusioned YVR. But he avoided the going overboard in favour of reliance on the market which became so common at this time, and never lost sight of markets’ dependence on the legal and institutional framework determined and enforced by the state. Moreover binary distinctions in much of the debate on the appropriate respective roles of state and markets in India seemed to him to take too little account of the medieval conditions and endemic discrimination facing much of India. What YVR had seen in his professional life was “a hard-soft state: hard on 90 per cent of the people and soft on the other, highly privileged, 10 per cent”. The latter 10 per cent were accomplished actors when it came to cornering the benefits of state action and successfully resisted the piecemeal reform attempted as part of the New Economic Policy of the government of Rajiv Gandhi in the 1980s.

YVR’s skepticism as to the universal relevance of any set of economic beliefs and ideologies served him well in his subsequent positions in financial policy making. There is none the less in his memoirs nothing as forceful concerning the limits of recent, all too pervasive tunnel vision towards finance as his remarks in his 2013 book (pp. 163-165 and 185-196) concerning what he calls “comprehensive regulatory capture” which dates from the period of push-back against the state in favour of reliance on markets in the financial sector. This, he believes, contributed to the blinding of regulators, government and much of the economics profession regarding the onset of the GFC as well as the constrictive character of the subsequent agenda of financial reform. In the 2013 book as well as in the memoirs he draws attention to the fact that a banking license is a privilege granted by society. Most financial intermediaries are entities with limited liability so that the liability of owners and shareholders is limited their invested capital. In return society should be able to demand services in the public interest and understanding that banking has a public-utility dimension. This attitude towards banking can be found in the literature as early as Adam Smith, and YVR has never lost sight of the way in which it justifies the embedding of social cohesion in policies towards money and finance.

Experience of Financial Crisis Management

YVR’s insights served him well as intellectual background for his work during the crisis and reforms of 1991-1993 as well as member-secretary of the Committee on Disinvestment of shares and public enterprises (chaired by Dr C.Rangarajan). YVR’s new posting in Delhi was as joint secretary, in charge of Balance of Payments, in the Department of Economic Affairs of the Ministry of Finance. Thus he witnessed as a government actor India’s financial crisis of the early 1990s.

YVR’s account of the causes of the crisis is frustratingly a little brief – much briefer than his account of the government’s response. India faced pressure resulting from unfavourable indicators but only in the spring of 1991 a potentially catastrophic position in its external trade and balance of payments. These problems coincided with the fall of two governments (Singh and Chandrashekar), the assassination of Rajiv Gandhi during the election campaign that followed, and global political uncertainties due to the first Gulf War with its unpredictable impact on oil prices (a spike of which would be an extremely important matter for India)[3].

YVR’s role in the management of the crisis was largely operational and informational: rigorous implementation of controls on foreign exchange, active participation in discussion of the treatment of Non-Resident Indians’ bank deposits which were a useful source of foreign exchange so long as the NRIs’ confidence in their convertibility was maintained, and the drafting of memoranda for the different persons at the top of the bureaucratic and political hierarchy which set out the background to and explained the main options for policy decisions. He also witnessed the debate on the use of the gold portion of India’s reserves. Interestingly in view of subsequent events he opposed the provision of payment guarantees to Dabhol Power Company (a project of Enron). On this he was overruled but the project eventually became the subject of a serious controversy and proved a serious financial burden. For YVR his experience of the reforms of 1991-1993 prepared him for his transition from civil servant to economic administrator.

The framework for external-sector management put in place in response to this crisis he sees as having stood the test of time. The pillars of the framework are “full convertibility on current account coupled with effective management of capital flows directed to ensure a realistic exchange rate and a current account deficit that can be financed by normal capital flows”. Pioneering features of the framework were indicators of vulnerability due to short-term external liabilities and the specification of a hierarchy among different categories of capital flow in terms of stability, both of which were important for balance-of-payments management.

Career diversification

Looking back at YVR’s career from today’s perspective his rise to Governorship of the RBI seems preordained. Yet this was not the way in which YVR himself viewed his progress which sometimes seemed to be leading away from financial policy and management. In 1993 he was promoted to a position in the Ministry of Commerce. This exposed him, inter alia, to the WTO issue of anti-dumping and to rules concerning overseas investments by Indian firms. Arguably, although he may not have been conscious at the time of the value of the new knowledge thus acquired, such work would have expanded his intellectual horizon to topics in cross-border economics which were growing in importance in the aftermath of the Uruguay Round multilateral negotiations and with the proliferation of treaties on trade and investment. In 1995 he was posted back to the Ministry of Finance this time to the Banking Division of the Department of Economic Affairs.

The work initially involved responsibilities removed from policy making, like appointments to the boards of directors of public-sector financial institutions. This changed in early 1996 when YVR was assigned responsibilities in connection with downward pressure on the rupee in the market for foreign exchange. Administrative measures and short-term borrowing by the State Bank of India from overseas branches moderated the pressure. But YVR was disappointed in his hope that his role here might lead to a full-time return to financial policy making. Instead he was offered a promotion to a position in the Ministry of Defence. This seemed a potential career cul-de-sac and YVR seriously considered resigning from the civil service.

Deputy Governor of RBI

Partly one suspects owing to the unwillingness of YVR’s superiors to lose somebody of such great ability (though this is my surmise and is not included in YVR’s own account) there was no resignation and YVR became a central banker (deputy governor of the RBI) in September 1996. His responsibilities included economic policy research, monetary policy, management of public debt and the external sector, and coordination of the different departments. He describes his six-year tenure as deputy governor during a period of momentous and rapid changes in the RBI as “both an education and a delight”.

As part of the reforms of 1991-1993 the RBI became less exclusively focussed on its role as banker to the central and state governments and more so on management of a system in which money and finance acquired greater importance in the allocation of resources. This required a more nimble work culture with improved interdepartmental coordination and more interaction with outside parties – from the private and public sectors and from academe. YVR was closely involved in this process of opening up and, owing to the breadth of his previous experience, in negotiations between the RBI and the rest of the government.

Such negotiations included the preparation of a draft agreement between the government and the RBI under which a new system of ways and means replaced automatic monetisation under which money was provided to the government as needed. This was to be the basis of the so-called big-bang policy announced in May 1997. This policy changed the nature of relations between different institutions in the economy: between the RBI and banks from micro regulation to macro management; between banks and borrowers through giving greater choice of banks to the latter and more latitude regarding modes of financing to the former; between banks and other financial institutions; and between the RBI and market participants through an expanded and strengthened consultative process.

Particularly importantly YVR was involved in designing a new framework of foreign exchange control more in accord both with current opinion and with the evolution of India’s own external payments situation. This framework replaced the tracking of individual transactions with an obligation for transparency concerning the stocks of external assets held by citizens and other parties. Current-account transactions that were legally authorised would not require further official approval apart from exceptional circumstances where government authorisation would be required. Capital-account transactions were in the jurisdiction of the RBI that could stipulate which could be undertaken without official approval and which required such approval – a system which YVR describes as a negative list for current-account transactions and a positive list for capital-account transactions.

Restructuring the RBI, the big-bang policy and designing the new framework for foreign-exchange control were major features of the early part of YVR’s deputy governorship. In the subsequent part the major reforms were the “landmark policy” towards the financial sector of 2001, which were partly a response to the reputational risks to the RBI due to the so-called Ketan Parekh scam involving a stock broker with this name, a new private-sector bank and some urban cooperative banks in Gujarat. Some of the reforms of the “landmark policy” concerned the RBI’s operating procedures in the money markets. Others were a wide range of regulatory measures: a ninety-day norm for the classification of non-performing assets in accordance with best international practice; guidelines on concentrations in banks’ exposures to individuals and groups of borrowers; guidelines for the exposure of banks to stock markets; revisions of the prudential regime, and a new supervisory structure for urban cooperative banks. The landmark policy also included plans for the RBI’s plans for divesting itself of all its ownership functions. During this period YVR opposed proposals to increase banks’ permissible exposure to equity markets contrary to the weight of official and professional opinion, and reacted skeptically to proposals to reduce the government’s share in the ownership of public-sector banks to below 51 per cent. YVR’s capacity for smelling out potential fraud in the financial sector – based on his willingness to put himself in the shoes of unscrupulous private-sector operators – elicited the admiration of his superior, Bimal Jalan, the RBI Governor.

YVR was also involved in decisions concerning pressures in the foreign-exchange market, for example, after the Asian financial crisis and the Indian underground nuclear tests in May 1998. During such periods he tended to favour reliance on standard policy tools, while Jalan was prepared to have recourse to less conventional administrative methods of control.

On the international front YVR represented India in the G-20, a group of finance ministers and central-bank governors representing 20 countries established in 1999 in the aftermath of the Asian crisis of 1997. YVR was also a member of a working group of the Financial Stability Forum (the predecessor body of the Financial Stability Board established after the GFC and responsible to the G-20) which dealt with the evolution a set of key financial standards. An outcome of this work was the decision of the government of India and the RBI that India should make its own assessment of its compliance with international standards and codes, which helps to explain YVR’s position (explained at the beginning of this review) in favour of a global agenda for financial reform consisting of minimum rather than uniform, detailed regulatory rules.

Bimal Jalan once said that if he were to single out YVR‘s most valuable contribution as deputy governor, it would be his work on the RBI balance sheet. This was a perceptive remark. The different tasks assigned to YVR could in many cases be carried out successfully only by somebody with the somewhat idiosyncratic knowledge and attention to detail which handling the balance-sheet implications of policy changes requires. As was indicated before and during GFC, even in the upper reaches of central banks in advanced economies there are weaknesses in the understanding of interrelationships – often evident through careful scrutiny of accounting data – between monetary policy, on the one hand, and financial markets and institutions, on the other. These weaknesses had an unfavourable impact on identification of the factors which contributed to the outbreak and management of the GFC.[4]

In August 2002 YVR joined the IMF as Executive Director for a constituency consisting of Bangladesh, Bhutan, India and Sri Lanka. YVR already had experience of the Washington institutions – of their weaknesses and strengths. He was aware that the conditionalities associated with IMF lending depended not only on economic but also geopolitical conditions linked to the IMF’s role as a creation of governments with unequal voice and strength (assuring the greatest weight to Western Europe and North America). The result, as he had long been aware, was the influence of the ideological predilections of its dominant membership. His first-hand experience increased the cautiousness of his views regarding liberalisation of the capital account and of the financial sector more generally.

Governor of the RBI

YVR’s term as Executive Director at the IMF was to be relatively short and in the summer of 2003 he was appointed to a five-year term as Governor of the RBI. He came to this post with beliefs about policy making forged during periods in the finance ministry and the RBI concerning the degree of autonomy vis-à-vis the government which he would enjoy – considerable regarding operational matters but more limited regarding policy matters and structural reforms where he acknowledged the ultimate authority of the sovereign but was prepared to argue his case where necessary as part of the process of consultations. More generally he believed that the policy maker enjoys reasonable unoccupied space between what is prohibited and what it is allowed by law, good policy in this space often eventually being transformed into law.

YVR brought to his post an aversion to instability. The benefits of growth he viewed as percolating to the disadvantaged with a lag, while but the impact of instability tends to be immediate and affects mostly those with limited capacity for risk bearing. In exercising his judgement YVR gave greater weight to savers and greater attention to stability. During his tenure household financial savings were high as was credit.

Early actions included the banning of investments through overseas bodies of NRIs owing to the opaqueness of their beneficial ownership. Another early measure was the strengthening of the RBI’s capacity to intervene in foreign exchange markets through an instrument called the Monetary Stabilisation Scheme which, in benign economic conditions where capital inflows were expected to be substantial, provided a formula for the sharing between the RBI and the government of the costs of the inflows’ sterilisation through special stabilisation bills or bonds (a scheme whose innovative character was much admired by other central bankers at the Bank for International Settlements).

YVR’s aversion to instability caused him to be alert to financial cycles which he realised can be independent of cycles in real economic activity. This led him to stress concepts like excess credit growth and overheating which were alien concepts to the political leadership and public, especially during a period of good economic growth and price stability. YVR stuck to his guns, tightening monetary policy in late 2006 and early 2007 and also taking regulatory measures targeting excess lending.

The RBI resisted the fashion during the early new millennium for inflation targeting, being able to draw attention to the relatively low rate of inflation which accompanied rapid economic growth during YVR’s tenure (an average of 9.5 per cent in three of the years). But as part of efforts to anchor inflation expectations the RBI accepted the recommendation of an advisory group headed by a former governor, M.Narasimham, and former deputy governor, S.S.Tarapore, for the constitution of a Technical Advisory Committee on Monetary Policy, which would submit the RBI governor for the first time to the discipline of a committee system and which could provide inputs from outsiders that were useful in fortifying the governor’s arguments in discussions with the finance minister.

Indian policy on the exchange rate was a compromise between two parties pulling in different directions. The government was happy to accept appreciation during periods of upward pressure on the rupee and supported the objective of moving towards convertibility of the capital account. The RBI favoured stability and was concerned with potential threats to this objective – of which the most important were thought to be fuel prices, food prices and dependence on portfolio flows on capital account. Stability was to be pursued through the moderation of excess volatility, the accumulation of adequate level of exchange reserves, and an orderly approach to the development of the foreign exchange markets. The RBI pursued its objectives partly through rules of thumb. Movements of the Real Effective Exchange Rate (estimated in accordance with a published methodology) within a five-per-cent band were not a source of concern; movements of between five and 10 per cent warranted close observation and intervention if volatility was above normal; and deviations of more than10 per cent was usually grounds for intervention in the foreign exchange market. The results were an exchange rate which fluctuated against the USD within a range of 40.2 and 44.1 between 2003-2004 and 2008-2009.

YVR was as ever skeptical of the benefits of convertibility on capital account. This was partly due to volatility of flows under this heading. But it also reflected YVR’s awareness that a large part of such flows took place through tax havens. Moreover some the flows involved round–tripping by Indian residents who illegally exported money and later reinvested it in India claiming the status of non-residents. In a speech in March 2006 the prime minister requested that the finance minister and the governor of the RBI come up with a road map to such convertibility “based on current realities”. The RBI appointed a committee under Tarapore which drew up a road map involving implementation over five years. Such action was shortly to be overshadowed by the impending GFC. YVR communicated his anxiety about this prospect to Indian industrial and banking leaders as grounds for resisting pressures to liberalise the financial sector. He found that his anxiety was shared by other participants in meetings at the Bank for International Settlements (BIS) such as William White, senior economic adviser, Jean Claude Trichet, chairman of the European Central Bank, and Axel Weber, governor of the Bundesbank (who was convinced that a housing bubble of enormous magnitude in the United States was starting to unravel).

YVR believed that the big financial conglomerates of the Anglosphere “would call the shots” in the forthcoming crisis. In a little noticed speech in January 2008 eight months before the crisis assumed a serious global form he warned that for such a situation “strategic management of capital account would warrant preparedness for all situations”. Contingency plans – with the emphasis on dealing with capital outflows – were prepared in the RBI together with draft press releases. In the event, relative to most other countries, India came out of the GFC relatively unscathed and without the need for special financing.

System Reform: Successes and Impediments

Reform of the Indian financial sector required in YVR’s view the need for action on several fronts,  which in many cases were interrelated functionally and politically. India’s financial sector comprises a huge sector of public banks, commercial banks (domestic and foreign), and other institutions which may be privately owned but none the less depend in varying degrees on public intervention and support. In the case of privately owned commercial banks reforms of governorship involved all categories of bank, entailing, for example, addressing the question of rules for the commercial presence of foreign banks. In the case of public-sector banks as well as those privately owned there was a need for prudential reforms, further definition of operations, and in many cases cleaning-up of balance sheets. Reform of governance, balance sheets and operation were also required for smaller, local institutions but the character of the reform was typically different owing to the context of the services which they provided, the operations and business models which these services required, and regulatory regimes in which state laws were more important.

The strengths of Indian public-sector banks lie in their large networks of branches and their familiarity with local businesses and society generally. However, the remuneration structures for their employees provide only limited incentives to performance and their governance is compromised by conflicts of interest. The RBI’s proposals for improvement, including a requirement of “fit and proper” for directors nominated by the government and a role for the RBI in clearing CEOs selected by the government, were significantly frustrated by political obstacles, for example, owing to the role of such banks in the country’s patronage system. .

The RBI had more success with respect to private-sector banks, which included two giants (ICICI and HDFC), foreign banks, and several smaller banks, some of which were controlled by investors with doubtful credentials or had capital falling short of regulatory requirements. The RBI’s policy for improvement consisted mainly of institutional consolidation and rigorous enforcement of “fit and proper” criteria for ownership and governance, initiatives to clean up balance sheets, and the strengthening of the prudential regime.

YVR’s reticence regarding an increase in the presence of foreign banks has already been mentioned. When YVR arrived as Governor, he was confronted with an announced government policy of according priority even ahead of the completion of domestic banking reform to an increase in the limit to 74 per cent on the permissible shareholding of foreign in domestic banks. The existing situation was somewhat complex: foreign banks could set up 100-per-cent owned subsidiaries but were not permitted to acquire existing private banks or to have subsidiaries with less than 100-per-cent ownership. Reddy’s problem was to use his formidable skills in policy design and negotiation with the government to combine the commitment on entry requirements for foreign banks with precedence for the sequencing of domestic banking reform. Under the proposed changes in the regime for foreign banks entry to the Indian market would be permitted through only one of three channels: (a) a branch; (b) a wholly owned subsidiary; or (c) a subsidiary with foreign ownership up to 74 per cent. (Reddy believed that such an approach would make the entry of foreign banks more difficult since most of the banks interested in a commercial presence in India already had branches and would thus henceforth be limited to this legal form.) Before the announcement of these new rules on commercial presence a comprehensive reform of the governance of banks (including those with foreign ownership) was announced. This covered criteria for shareholdings above 5 per cent; requirements to be met in the case of members of the board; and additional requirements for the CEO. The new rules on foreign presence were eventually included in a comprehensive agenda for banking reform announced by the Minister of Finance in his 2005-2006 budget speech. This covered  rules on liquidity management, greater flexibility for the RBI in the prescription of prudential norms, revised rules on items which could be classified as capital, and provisions enabling the RBI to conduct consolidated bank supervision in accordance with international best practices. The liberalised policy on foreign bank entry was accompanied by reciprocity conditions under which foreign banks’ presence in India would depend on the rules for market access in their parent country for Indian banks.

The changes in prudential rules for banks during YVR’s governorship proved in the outcome to be well designed to help provide Indian banks with protection against financial instability. Recourse to derivatives in foreign exchange markets was limited to hedging operations for clients who understood the possible implications of using such instruments. Despite the government’s enthusiasm for a more active role of banks in capital markets the RBI favoured a more restrictive policy since it believed that the banks, particularly those of the public sector, were not yet equipped for large-scale participation in these markets, and that they should still concentrate on their core competence of providing working capital for economic agents. Nevertheless constraints on their operations were relaxed where this was necessary to enable them to compete with other forms of intermediation.

Anticipating procedures prescribed by Basel III, which, published in 2010, included a countercyclical capital buffer to provide banks with resources for controlling risks associated with potential eventual losses due to the build-up of risks during the upward phase of financial cycles, the RBI’s policy statement of November 2003 suggested that banks should increase their investment fluctuation reserves. These reserves had been introduced in India in 2002 as a countercyclical measure with an objective analogous to that of Basel III. Banks’ exposures to risky assets (real estate, personal loans, credit-card receivables, and capital markets) were contained through the way in which risk exposures were calibrated for the purpose of estimating capital requirements. Moreover the markets for securitised assets and credit derivatives in India were still in their infancy at the outbreak of the GFC so that banks had little exposure to these categories of toxic assets. Perhaps most remarkably in view of the role of interbank exposures as threats to financial institutions’ solvency in the GFC, prudential limits were placed on interbank liabilities of the banking sector, “thereby nipping the problem of ‘too interconnected-to-fail’ in the bud”.

The RBI’s track record on reform of other different categories of bank was mixed. In the case of rural cooperatives increased funding by the central government was not accompanied by fulfilment of the conditions with which it was supposed to be associated owing to local political interests. The record with respect to reform of urban cooperatives was much better, largely in YVR’s view owing to the way in which state governments were brought on board. Financial inclusion of the disadvantaged (the provision of no-frills accounts by financial institutions, for example) was part of a policy statement of the RBI in 2005 but YVR realised towards the end of his tenure that the financing needs of the widely dispersed informal sector would not be met in the near future by the formal financial system so that a continued role for moneylenders was inevitable. Here too YVR decided to rely on cooperation with the states through which reasonably effective law, regulation and enforcement might be achieved.

Access to finance for all common persons was an important objective of YVR’s governorship. Reasonableness of bank charges became the subject of a code monitored by Banking Code and Standard Board of India. ATMs were actively promoted by the RBI: payments to customers through ATMs were to be free regardless of which bank owned the ATM. For YVR, inter alia, the ATM served as a social leveller since all customers had to stand in the same queue. Privileged customers no longer got faster service, a development of special significance in India, characterised as it is by perceptions and practice of social discrimination.

Interactions with Institutions, Politicians and Colleagues

From his period as a deputy governor of the RBI onwards YVR attended international institutions and meetings in a subordinate or sole role. His misgivings about the effects of the governance structure of the IMF have already been mentioned although he also acknowledges the value of the analytical coverage of India by the IMF and its other assistance so long as the country was not in need of its financing. For YVR the IMF’s reaction to GFC highlighted analytical weaknesses in its treatment of the relation between the financial and real sector and blindness to the possibility that there could still be a major crisis in advanced economies. There was also a need for a change in the IMF’s professional and intellectual culture: less thinking in silos, more candour in its assessments, and greater openness to alternative views.

YVR acknowledges that one thing he missed after his retirement as Governor was attendance at the regular meetings of central bankers at the BIS in Basel. These function as a sort of club for central bankers and enable an exchange of views between official participants on global economic developments. YVR’s attendance contributed to his understanding of the policy responses of different countries to these developments. As mentioned earlier, at the BIS he found other central bankers who shared his misgivings about the trend of economic and financial conditions during the period leading to the GFC. YVR also benefited from discussions in fora central bankers exclusively from emerging-market economies.

YVR describes at considerable length his interactions with governments and finance ministers in India. An undercurrent of many of these interactions was differences between him and the ministers (and the governments of which they were a part) over financial liberalisation concerning whose benefits he was more sceptical than his political masters who were influenced by the prevailing political and intellectual climate. The concessions and negotiating ruses that YVR felt necessary in order to protect for him the more important objective of avoiding premature liberalisation were a regular feature of his dealings with governments until the threat of the GFC provided relief by strengthening the case for caution on greater financial openness.

Aside from the differences of opinion on financial liberalisation YVR’s relations with Jaswant Singh, finance minister of the national Democratic alliance led by the BJP, were smooth with Singh proving generally supportive. P.Chidambaram, finance minister of the Congress-led United Progressive Alliance, was at times more prickly. YVR once more disagreed with the minister on policy towards foreign banks and now also over Chidarambam’s support for a rapid development of financial markets more generally. Differences extended to other areas: Chidarambam did not like YVR’s references to “overheating” in discussing the way in which the financial cycle was not necessarily synchronous with that of real economic activity, a characterisation that in Chidarambam’s view might lead to a premature macroeconomic tightening; and he was also uncomfortable with the RBI’s intervention in foreign exchange markets to check the appreciation of the rupee, due partly to increased capital inflows, with the aim of maintaining a competitive exchange rate and a sustainable current-account deficit. The controversy concerning “overheating” was settled by avoidance of the term in discussion of policy. That on foreign exchange intervention was ended when the government took the view that that the accumulation of foreign exchange reserves had gone far enough so that the RBI’s policy of using reserves to maintain stability of the exchange rate should continue. YVR sums up the tensions with Chidarambam as “discord that ultimately gave rise to better ideas or outcomes”.

Retirement from the RBI and New Activities.

Unsurprisingly YVR has remained active since stepping down from the RBI. His major official assignment after his retirement from the RBI has been his chairmanship of the Fourteenth Finance Commission that produced a report which proposed a major increase in the scale of transfers between India’s central government and the states. Owing to his prestige as a “wise man” who played an important role as RBI Governor in keeping India out of the GFC he has been invited to be a member of several bodies established with the aim of suggesting reforms for a fairer international financial system and one likely to provide defences against a new financial crisis. These included the Commission of Experts of the president of the United Nations General Assembly on Reform of the International Monetary and Financial System. The value of these initiatives in his view was the way in which they defined major issues for discussion. But implementation of their recommendations was unlikely in view of the opposition of the Washington institutions to any replacement of their position at the centre of global finance and of the establishment of the G20 as the principal multilateral body for developing policy towards the consequences of the GFC.

Since his retirement YVR has also authored a number of compilations of previous articles and speeches. But these memoirs are his first book which provide an integrated treatment of the way in which his thinking has developed over the years and has influenced his actions as a public servant. For anybody interested in the dimensions of financial policy in a developing or emerging-market economy the memoirs are fascinating and highly educational reading. My only significant criticism is that occasionally – despite the copious footnotes – it is not clear when YVR and the RBI introduced regulations or measures using its authority under pre-existing legislation or when it required new legislation in order to act. Perhaps the most appealing feature of the exposition is the way in which it describes the positions – sometimes conflictual – of the major figures involved in the events covered and the procedures and exchanges through which such conflicts were resolved. The accounts here do not gloze over disagreements but are consistently respectful of the different participants. No doubt the description of policy making and implementation as processes helped YVR to select his title, Advice and Dissent.

About the Author

[1] Whilst still a trainee for the Indian Administrative Service Reddy shortened his signature to Y.V.Reddy in the interest of avoiding exhaustion from exceptionally frequent use of his longer signature. In this review this is further shortened to YVR.

[2] A more schematic exposition can be found in Reddy’s 2013 book, Economic Policies and India’s Reform Agenda New Thinking, New Delhi, Orient BlackSwan, reviewed by me in a two-part article in SUNS – South-North Development Monitor, 27 and 28 May 2013, which is also available on the IDEAS web site.

[3] In interesting remarks during the launch of his memoirs in Geneva YVR emphasised that with India still a relatively young independent country at the beginning of the 1990s destabilising perceptions concerning the political system, including those of external investors and lenders, were more of a threat than they probably would be now.

[4] These lacunae in the culture of central bankers and financial analysts are emphasised in the 2016 book (Tectonic Shifts in Financial Markets People, Policies, and Institutions, New York, Palgrave Macmillan) of Henry Kaufman, former partner of the investment bank, Salomon Brothers, and principal author of the long well known weekly publication, Comments on Credit.