Former Reserve Bank Governor YV Reddy has warned the RBI that for a central bank, reputational risk is the worst kind of risk and its role is under threat, which is now a "national" problem that must be addressed.
In an interview with CNBC, Reddy likened the role of a central bank to the army -- just as the latter ensures security of a nation, a central bank works to ensure the the financial and monetary security of the country, stressing the importance of an independent central bank whose role goes beyond guiding monetary policy.
"There should be a debate at this juncture given the type of comments internationally cutting across political parties that what should be the nature of central bank and what it should be and how it should be run," Reddy said. "The financial stability function should have been with a non-political set-up like Governor of RBI. Now, that initiative is gone to the government."
"I would even go to the extent of saying that particularly recent events, I have seen the comments from the economists, from Standard and Poor and they are disturbing," he said. "For the RBI, for a central bank, reputational risk is the worst risk. Credibility is the worst risk."
On demonetisation, he noted that "the pain has happened" and going forward the bank should focus on relieving the pain maximising the gains.
As such, tackling "blackmoney" is a complex problem, especially in a country like India, where "the administration, the incentive mechanism, the judicial mechanism, the legal mechanism are outdated for a modern economy."
Read the full interview here.