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Can’t Eliminate Black Money by Destroying Cash: Former RBI Guv

Former RBI Governor VY Reddy said that the RBI is facing 'reputational' risk and its identity as an institution has been damaged.

When asked if he would have accepted the government’s decision to demonetise Rs 500 and Rs 1,000 currencies to curb black money hoarding as the RBI governor, he gave an indirect response saying what mattered are the steps that will be taken after implementing the decision.

Reddy, who served as the Deputy Governer in the RBI for seven years, before being appointed as the RBI governor by the Vajpayee government, (a post that he held for five years), was of the opinion that black money cannot be eliminated by destroying cash through demonetisation. He was speaking in an interview with CNBC TV 18.

Thinking that cash is equal to black money is incorrect.

He said that the two factors, which are the administration and the people that work in tandem with them to allow corruption, will have to be checked together.

So the way I look at it as the practical point of view is, the ‘pain’ has happened, how will the ‘gain’ happen? Black money is a result of two factors: The administration and the people. Unless both are colluding in someway, black money cannot be hoarded. The attack should be on both factors and it should be simultaneous, synchronised, symmetrical.

‘Position of RBI Governor Has Been Devalued’

Comparing RBI with army, Reddy said that financial and monetary security of the country rest with RBI.

There is a confusion (about the role of RBI) at philosophical level. I feel the RBI is treated as a regulator. To be very frank, my own frustration is that the institutional identity of RBI has been damaged. The RBI is a monetary authority. Yes but it is full service central bank... It was in-charge of many other things.

Asked whether the position of RBI Governor has been devalued, Reddy said, "Definitely there is a problem especially after legal amendments, the way Governor is selected, the way deputy Governor is selected.”

Expressing concern over comments against RBI by international agencies like S&P, Reddy said, "For central bank, reputational risk is 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 time there should be a debate at this juncture, given the type of comments internationally, cutting across parties, on what should be the nature of the central bank and how it should be run," he said.

(With inputs from PTI and CNBC TV 18)