This bureaucrat-economist turned central banker has been deeply engaged with India’s economic reforms from the start. As part of a high-level committee, Dr Y V Reddy helped pull India out of the balance of payments crisis it faced in 1991. He strongly believes that the lessons learnt from that crisis, of keeping a strict vigil on debt-creating capital inflows, particularly short-term debt, saved India from the ravages of the Asian crisis that followed in 1997.
Dr Reddy has unmatched experience in the execution of India’s fiscal and monetary policy, management of balance of payments and financial sector reform, having held key positions in the ministry of finance, the central bank and as adviser to multilateral agencies such as the World Bank.
When international economic sanctions were imposed on India after its nuclear tests in May 1998, the rupee plunged as foreign investors pulled out. Dr Reddy, then deputy governor at the central bank, quickly devised a rescue plan in the form of a foreign currency bond sold to expatriate Indians that raised $5bn and shored up confidence. When he returned to the central bank last September from Washington, where he was executive director at the IMF, capital inflows were surging and India’s foreign exchange reserves had exceeded $100bn.
The first step he took as governor was to cut the interest rate that banks offered on expatriate deposits, slowing short-term dollar inflows, and to allow Indian companies to borrow overseas when global interest rates were low. A cautious liberaliser, Dr Reddy has, in a recent speech, pointed to the vulnerability of developing countries to external shocks in the move towards full capital account convertibility and stressed the need to manage that process.
The challenge for the governor under the new regime will be to deal with the impact of possible fiscal slippage and a sharp rise in international crude oil prices on interest rates and inflation, which rose sharply to nearly 6% in early July.
