"When I look at my career, I believe all — ministers or bureaucrats — have been, by and large, good"

It was sometime in 1990 that I began my stint, dealing with the balance of payments crisis, as it unfolded. The period was a politically tumultuous one, following the assassination of Rajiv Gandhi, coming on the back of the fall of the Chandrasekhar government and a caretaker government running the show, till Narasimha Rao took over.

At one stage, there was a suggestion to freeze non-resident Indian deposits with banks in India. When asked for my view, I suggested that such an option should not even be brought up in any discussion or documented. My concern was that if India lost the confidence of her diaspora, it would hurt our self-respect and pride across the globe.

At one stage, I was told that I might have to travel to Brunei one night secretly to obtain funds under instructions from the finance minister! It was a mission that I had to keep privy even from my family. I had packed my suitcase and told my wife Geetha that I was going to Mumbai for some urgent work. It was unwise and impractical and, fortunately, a little before midnight, the plan was called off.

There was a strong consensus among political leaders and professional circles that the country should not default on its debt obligations. The pledging of gold to the IMF was possible because of that consensus. In the three years of 1990-93, which spanned crisis and reform, we had seen three prime ministers, three governors, three financial secretaries and three chief economic advisors, I was the only constant. What was needed was political sagacity because everyone knew that, over the past 10 years, India’s old economic model had broken down. What was lacking was the political will and wisdom; the crisis was also an opportunity. PV Narasimha Rao had it, and the country was also fortunate that Dr Manmohan Singh had become the finance minister as he had been closely involved with the policies of the past – the good, the bad and the ugly. 

Once the BoP crisis blew over, and after India embraced liberalisation, I offered prayers at the Balaji temple at Tirupati. Kulkarni, my colleague at the RBI, got his head tonsured as a traditional token of gratitude! It was only appropriate given that, outside of any central bank vault, Sri Venkateswara Swamy held the largest stock of gold at 200 tonne!

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In May 1993, I was promoted to the rank of additional secretary in commerce ministry. During my stint at the ministry, I spent a lot of time understanding the Indian economy, even more than the chief economic advisor! But my interactions with the commerce minister increased after P Chidambaram took over. Clad in a traditional South Indian snow-white dhoti and shirt, Chidambaram had the reputation of being a brilliant man and unsparing. A master of detail, he was also an unforgiving boss. Once he found a mistake in the file that I had submitted. “It’s a mistake,” he remarked. “Yes, sir. It is a mistake,” I replied. He looked at me and repeated: “It’s a mistake.” “Yes, sir, it is a mistake.” He repeated, “It is a mistake.” I submitted. “I’m sorry, sir. It was, indeed, a mistake.” 

I had another interaction with Chidambaram, which went differently. He had sought my views, we differed and, after hearing me out, it was clear that his stance was wrong. “It was a mistake,” he exclaimed. “It was a mistake, sir, a mistake,” I repeated. He looked at me with a smile and said, “Yes, it was. I am sorry.” The ice was broken.

In August 1995, I was posted as secretary, department of banking, in the ministry of finance. I was happy to be back. A year later, one day in July, I got a call from Surendra Singh, cabinet secretary, asking me to meet him at his office in Rashtrapati Bhavan. He said, “Venu, you are senior and you have many years of service left. So, we are thinking of posting you to an important ministry I have in mind — ministry of defence. I just wanted to tell you this personally.” I responded, “Sir, please do not bother. I will quit.” Though an important posting, I felt defence was not my area of expertise.

Around the same time, SS Tarapore, RBI deputy governor, who was about to retire, told me to consider his job at the central bank. Incidentally, during my days at the commerce ministry, RBI governor C Rangarajan had suggested that I join the RBI but I hadn’t shown any interest. But this time when he suggested my name, Chidambaram asked me if I was interested and I said “yes”. That was a turning point which enabled me to learn applied economics under the guidance of Rangarajan. 

***

I was sad to leave the government that I had served for three decades, but during my tenure of six years, from 1996 to 2002, I had greater freedom to state my views on broader policy matters than when I was in the government.

Among many challenging and fulfilling moments as deputy governor, one is related to the RBI’s balance sheet. A bone of contention had emerged over what amount should go to the reserves before transferring surpluses to the government. In 1995, the central bank’s auditor had suggested that transfers to the reserve must have a relation to the total size of the balance sheet, and also the profits for the year. An informal group was set up in 1996-97 to look into the issue. The group recommended that indicative target of 12% of the size of the bank’s assets would be appropriate, while the prevailing level was much below that. Finance secretary Montek Singh Ahluwalia sought my opinion by asking me: “This is too complicated. If you were in my position in the finance ministry, would you agree to the proposal?” I replied, “Yes, definitely.” He gave me the go-ahead. Such was the mutual trust and level of respect for professionalism that we had in each other.

Another interesting episode was around the depreciation of the rupee. I felt it should be allowed freely as long as there was no serious panic and, in the meanwhile, the central bank had to be ready for an initial marginal overshooting over the desired level. Rangarajan, Ahluwalia, Shankar Acharya and I went to meet Chidambaram, who was then the finance minister, at his residence to debate on this. Chidambaram felt that the RBI had to moderate the pace of depreciation, but I was against it. The governor and finance secretary left it to me to argue my case, against intervention at this stage. But I couldn’t convince the minister. Despite the minor differences, the overall coordinated strategy in the forex market was successfull. The subsequent Asian financial crisis, however, underscored the fact that a timely induced exchange rate depreciation had helped in moderating the impact of the crisis. Tarapore, my predecessor in RBI, in fact went on to write in the magazine of the Bank for International Settlements that, when definitive monetary history of the period would be written, “Dr Reddy would come out as the saviour of the Indian exchange rate policy.”

In November 1997, Bimal Jalan took over as the governor. An informal, affectionate, pleasing and cheerful personality, Jalan was essentially a strategist, with a quick and instinctive grasp of complex realities, while Rangarajan had a deep understanding of systems and liked to drive the changes.

Jalan was instrumental in ushering the indirect intervention of the RBI in the forex market through select banks, a step which, initially, I felt wasn’t right. However, later, the efficacy of the move did prove that my apprehensions were wrong. There were instances that we had strong, differing views, but mutual trust never diminished.

Once, during AB Vajpayee’s tenure, following the Pokhran nuclear test, Jalan had been alerted that the US would be imposing sanctions on India. Jalan was worried that the move would create a turmoil in the forex market and wanted to issue a statement of assurance. I said, “Sir, my only request is that no statement be made till we observe the reactions.” The idea was not to stick our neck out given that there were too many imponderables and uncertainties.

As we were leaving, I accompanied him for a final word, when he told his executive assistant: “Sandip, no statement need be issued.” He looked at me with his usual disarming smile and said “Okay, good night, Venu.” The next morning he rang me up and said: “Venu, congratulate me for accepting your advice! We did not issue any statement, and the markets are reasonably normal.”

Another memorable interaction with Jalan was with regards to the exposure of banks to equity markets. There was a proposal to increase the exposure of banks to equities, from 5% of incremental deposits to 5% of total outstanding advances.

My view was that linking exposure to 5% of advances would result in a sudden and huge window of exposure to equity in one go, and that could be exploited were a bank to collude with a broker. My fears weren’t misplaced.

On March 1, 2001, when the Ketan Parekh scam roiled the markets, Jalan called me to his office. He said, “Actually, there has been very little increase in aggregate exposure of banks to equity markets, still this scam took place. Tell me, how did you and why did you suspect that something like this might happen?”

I replied: “Whenever I assess a policy proposal, I think of only one thing. How could the player in the finance business make money? If I am on the other side, I can think of making money out of every change in policy. That would be the market’s reaction. So, I keep asking, what would that attitude of markets mean to my policy?” A smiling Jalan said: “I am glad that you are not on the other side.”

***

My extended term at the RBI came to a premature close when I was offered the executive director’s position at the IMF. “Venu, why were you in such a hurry to say ‘yes’? Do you know how they select an executive director in the government? Either for services rendered to those in power or to get rid of you. You did not serve anybody’s interest,” Jalan questioned me. I told him my son, daughter and grandson were all in the US and I was more than happy to go.

So, I took charge as ED at the IMF in August 2002. But the stint didn’t last for long. In April 2003, I was in India and made a customary call on Jaswant Singh. Out of the blue, he said: “We are considering your candidature for the RBI governor’s position.” I replied: “Sir, I have a three-year term… I am happy and settled in the fund. I am already 62 and not keen to be considered.”

But that was not to be. Though my family back in the US wanted me to be firm about not moving out of the fund, I knew I could not afford to displease the government beyond a point. More importantly, I would not be able to work at the IMF after defying the government!

So when I took over as the RBI governor, I called upon Manmohan Singh, who was then in the opposition. He was very happy and said: “I can sleep peacefully as the financial sector is in your hands.” Dr Singh was always very generous to me.

*** 

As the governor, it was quite an interesting journey. The RBI became much more outward-looking and market-friendly rather than an inward-looking regulator. But it was also a time for guarding the RBI’s autonomy even while working closely with the government.

During Jaswant Singh’s tenure as the finance minister, there was excess capital flows, and so the RBI had to use the money for sterilisation. I was of the view that the government had to take the responsibility through cost of the sterilisation of bonds, but the finance ministry’s view was that, were the fisc to bear the burden, the RBI would be seen as losing its independence. My stance was: “Dealing with capital flows requires support from the government, and not independence.” I still remember the sentence I told the finance minister: “Sir, a strong central bank can serve you better in times of difficulties.” Being a statesman, Dr Singh supported the RBI, despite adverse impact on the general budget.

Soon after the UPA came to power, the government wanted to implement a policy of opening up our private sector banks to foreign banks, which was announced by the NDA in consultation with my predecessor Jalan. I, though, had opposed the implementation.

At one stage, Chidambaram asked:  “Just because the RBI governor changes, should the commitment of the government to the global community be changed?” He was right, so I quietly told the secretary in finance ministry that my conscience won’t allow me to be party to this. I believed that we could allow for the change in a time-bound fashion, but if the government is not prepared to reconsider its decision, I offered to get admitted into a hospital and retire! The government could then get a governor committed to the policy, rather than a reluctant one like me.

To the credit of the leadership, the matter was reconsidered. The finance minister told me: “We cannot change our policy, but we accept your point that it’s premature, so give me a roadmap.” I, too, agreed, because my point was not to prevent the move, but it was more to give an opportunity for the domestic banking industry to develop, deregulate and then open up for competition.

I believe that, in policy-making, arriving at an appropriate solution is both science and an art — in search for the desirable, move towards the feasible, but at the same time assess the cost and benefits of both. It’s always important to keep the desirable in view, while doing what is feasible.

***

Today when I look at my career, I believe all, be it ministers or bureaucrats, have been, by and large, good. They rarely approached me for anything that I wouldn’t have accommodated. Of course, my family, relatives, my wife, all of them took care not to do anything that would compromise my integrity. So, I would say, if I have been reasonably successful in my career, I owe it as much to my parents, my family, my relatives and my friends. I still remember my ayya’s words that character is most important, and that fate decides your life.

If ever there ever was a quote to summarise my journey in life it would be this:
Haste not—rest not—calmly wait,
Meekly bear the storms of fate;
Duty be thy polar guide,
Do the right whate’er betide;
Haste not—rest not—conflicts past,
Peace shall crown thy work at last.

This is Part 3 of YV Reddy's Secret Diary; Read Part 1 and Part 2 here.