Soon after taking office in September 2003, Reserve Bank of India Governor Y.V. Reddy emphasised a judicious mix of continuity and change in the conduct of monetary policy. A second important objective was to continue with the process of demystifying the policy and thereby turn the annual statement and the three quarterly statements into “non-events”. Both these have been the defining characteristics of monetary policy over the past five years that witnessed sustained economic expansion amidst low inflation. The economy moved up to a higher growth trajectory. The average annual GDP growth rate touched 8.8 per cent and inflation remained well within tolerable limits in the first four years. Spurring growth without hampering price stability ought to be counted as a significant achievement in that period. However, the more recent challenges in the wake of the persistently high inflation are testing the resolve of policy makers. The inevitable monetary tightening has pushed up interest rates, slowing down industrial growth. While there are critics who say that the RBI has been behind the curve in fighting inflation, another view is that the monetary measures have been too harsh. Inflation might still be a monetary phenomenon but the RBI, like many other central banks, has been constrained by the fact that it is a global problem caused by the unprecedented upsurge in oil and other commodity prices.
The persisting financial sector crisis has roiled many banks and institutions in the Western markets. The fact that no Indian institution has been affected so far speaks volumes of the record of a central bank which critics have accused of being too conservative. Dr. Reddy himself would like to define his approach as calibrated. Certainly, the RBI’s measured rather than knee jerk responses have stood the country in good stead in many areas. For instance, both in the march towards capital account convertibility and financial sector reform, its step-by-step approach has been vindicated. The exchange rate policy — the rupee is on a managed float — has stood the test of time and is emulated by many countries. Dr. Reddy’s caution on the deployment of forex reserves has been proved right. Although reserves are now more than four times of what they were five years ago, recent developments suggest that they may not be stable. It is during his time that steps have been taken to foster financial inclusion and financial literacy. Perhaps Dr. Reddy’s biggest achievement as RBI Governor lies in ensuring a reasonable degree of autonomy for the central bank and in underlining the fact that fiscal profligacy is a prime factor behind inflation.