Reddy steady. Now run

A job that was always important but scored somewhat low on the buzz-metre is today even more important, and establishment Delhi is abuzz about it. This week the government will have to announce its choice for the next RBI governor; Y.V. Reddy demits office on September 5. Whoever gets the job will start with two different initial conditions. First, thanks to the buzz his first few months will be closely scrutinised; no quiet settling down at the corner office in Mumbai’s Mint Street complex. Second, the appointee will be judged primarily on his ability to appreciate and lead change. This holds even if Governor Reddy gets an extension. India has changed. The world has changed. RBI hasn’t changed. RBI doesn’t particularly want to change. But for a variety of reasons, the costs of a status quo have gone up sharply. So the next RBI governor shouldn’t be a central banker who says turmoil and depression in high finance — there’s turmoil and depression in finance these days — means nothing should be changed.

There are three important reasons why this is the right time to change RBI. First, there are well-written, impartial and new intellectual guidebooks on RBI reform: the Mistry and Rajan committee reports. Second, the opportunity cost of insufficient financial reform has become clearer, not fuzzier, after the global credit crisis — only India’s equity markets are sophisticated by global standards, its banks, its debt market, its financial products are all so 20 th -century. Third, the growth versus inflation debate has acquired political traction like never before. The last is hugely important, more important than perhaps monetary economists advocating RBI reform realise; they typically stress on the first two factors.

When high interest rates slowed the economy down sharply in late-middle ‘90s, the constituency for growth wasn’t as big and as worried as now. Therefore the political stakes are bigger now. Not for nothing have ruling party leaders been as worried about inflation as about high home loan rates and tried to find political economy short cuts by asking public sector banks to be gentle on rate hikes. This change in politics is not going to go away, it will get sharper. And politicians should want an RBI that of course makes independent judgments but one that has a stake in India’s broad transformation. That means an RBI governor intellectually at home with this remit.