Abhishek Kelkar and Niharika Gunturu interview Dr. YV Reddy who was in the institute on 18th January to give an EML.

Dr. YV Reddy is perhaps one of the few bureaucrats in India who has worked in the entire spectrum of public service. He started off his career as an IAS officer and went on to be  the Governor of the Reserve Bank of India, an Executive Director at the IMF, the Chairman of the Asian Consultative Council of the Bank for International Settlements and Chairman of the 14th Finance Commission. One of his most significant achievements was forseeing the 2008 economic crisis. Many credit his policies during his tenure as RBI Governor as the key factor for insulating the Indian economy from the near-worldwide recession. In fact, Nobel Laureate Joseph E. Stiglitz was quoted in an interview as saying- ‘If America had a central bank chief like Y.V. Reddy, the US economy would not have been in such a mess.’

On RBI and Autonomy:

His experience uniquely qualifies him to provide us a neutral perspective on many controversial power dynamics at organizations of national and international importance. For instance, The Reserve Bank of India has recently come under scrutiny for one of the most landmark moves in India’s economic history – demonetization. Several watchdogs claim that the Government had possibly overstepped into the RBI’s territory of autonomy.

Correspondents: Having been both a government servant and the Governor of RBI, what are your views on the autonomy of RBI?

Dr. YVR: There are two major parts to the whole economic scenario. When it comes to the financial well being of the country, there are two major players providing perspective to the economy. One is the ruling party of the Government of India and the other is the seemingly non-political civil-servants in the RBI machinery.

In order to keep the entire republic running smoothly, a mutual trust between these two entities is of prime importance. After all, both are working towards a common objective of the economic well-being of the nation. In fact, the RBI was established by the government, in order to guide the nation through the financial jargon into better decision making. However, everything is not as jolly good as it sounds. Most of the major problems arise because the RBI has to consider the long-term repercussions of its decisions on the country whereas the government mandates work on a 5 yearly basis because of the structure of the Indian democracy. While the democracy is designed to construct a system where the country can ideologically head in a different direction with every election cycle, the country cannot keep changing its economic course every five years. Economic planning is long term and the economy must have some semblance constancy.

At the end of the day, the RBI is the custodian of the Republic.

While it is entitled to be independent, it cannot afford to be ‘irrationally exuberant’ and end up generating too much friction with the government or the general masses. A hint of tension is inevitable, healthy even, but the system has to keep doing its job by the book without causing the people alarm or offending the government.

Policy feeds off the short term, ‘quick reform mentality’ through its five year plans but it needs to enable reconciliation with the slower, deeper systems too. At the end of the day, substantial decisions, reforms and impact are a matter of co-operative and long-term efforts.

On Financial Inclusion:

On the note of policy reforms derived from manifestos, the current government has taken a special initiative to bring a greater fraction of the population into the banking system through several schemes- such as the Pradhan Mantri Jan Dhan Yojana.

The scheme aims to reduce the paperwork and procedure involved in opening bank accounts, so as to provide an incentive for more citizens to enter the banking system. Infact, even those persons who do not have any of the ‘officially valid documents’ can open “Small Accounts” with banks on the basis of a self-attested photograph and putting his/her signatures or thumb print in the presence of officials of the bank.

The scheme offers a host of benefits including accidental insurance cover of 1 lac, life cover, access to pension, insurance products and no minimum balance. The scheme is arguably the largest financial inclusion measure taken in India’s history. It is interesting to note that this concept of ‘financial inclusion’ was first coined by Dr. Y. V. Reddy during his tenure as the Governor of the RBI in his 2005 Annual Policy Statement.

Correspondents: What are your current views on financial inclusion and do you think the idea of financial inclusion still fits in the 2018 scenario?

Dr. YVR: Financial outreach is twofold, involving giving credit and societal inclusion. When I coined the phrase, I had societal inclusion in mind. Finance is a service provided by the central bank and the government for the general masses. The Indian financial machinery was designed to serve the nation. This implies that the financial services in the nation should be charged a minimal amount if not totally free.

Banks should be made more accessible and reach out to every corner of the nation.

Giving unsecured credit, however, is a dangerous move that most governments take up in order to fulfill their manifesto points. Unfortunately, ‘financial inclusion’ has now been defined in the context of giving credit.

The financial system sustains on deposits and transactions by the consumers. A general consumer needs to understand that credit involves risk to some degree, and it needs time to nurture. The nature of credit identifies the nature of deposits that a bank receives which in turn reflects on the functionality of the bank. The credit-deposit trade-off has not only had financial impacts but also yielded social and political impacts.

Societal inclusion is especially important and most of the time a heavily ignored decision by policy makers. The current government is trying to help quite a bit through the PMJDY. However, whether it is catering to the masses is a question that is still unanswered.

On Data in Finance:

The data revolution has taken several industries by storm, including that of finance. The Chartered Financial Analyst exam, a prestigious qualification in the field, plans to incorporate Big Data, AI and Analytics as part of their upcoming examinations. While it is not uncommon for data science to infiltrate fields with the need for predictive analysis, we have good reason to be skeptical about its feasibility in finance. Financial data is not only complex, nonlinear and devoid of direct correlations – but also ‘fixed’ and susceptible to high manipulation. For instance, certain central banks in the world do not allow their currency to flow freely, they take a number of policies to essentially ‘fix’ the exchange rates each day.

Correspondents: So, would it be sensible for us to spend resources into building complex predictive models, if the integrity of the data is surely questionable?

Dr. YVR: First and foremost, this ‘fixing’ of financial data isn’t a fault limited to the public sector, it is prevalent throughout the world – even in private organizations, the LIBOR scandal is a case in point. Collusion is ever prevalent.

From the eyes of a bureaucrat who fares from a heavily finance oriented background, the data revolution has started to seep into the system bit by bit, although with a pinch of salt. Data Analytics is perceived as a tool for forecasting and definitely a powerful and handy instrument for policy-making and intervention.

That financial data processing and policy making is an art, and shouldn’t be treated like a science. With data science follows an inherent uncertainty which sometimes the government or the system cannot afford. Models are helpful tools, but only to supplement processes, not be the basis for decisions.

One should be wary of these predictive data models as well.  It is possible to build models to suit whichever conclusion you want to reach (say a higher GDP, lower inflation indices)  by suitable tweaking of parameters in all the myriad of equations.

One must always remember this: after building complex mathematical models, if the final outcome doesn’t match what your common sense intuited, the outcome belongs in the trash.

The volumes of data stored and analysed also bring out larger questions of data security, and we should take all these factors into consideration.

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