Yaga Venugopal Reddy

Yaga Venugopal Reddy Has Stuck to his guns. Continuing his attempt to keep the funds in the system—and, thus, the value of the rupee—in check, the Governor of the Reserve Bank of India chose to hike the cash reserve ratio by 50 basis points to 7.5 per cent, thereby signalling a halt to the incipient southward movement of interest rates.

The move was aimed at addressing the “capital inflows” issue, which has been fuelling the rise of the rupee against the US dollar to uncomfortable levels— it has gained over 12 per cent since January.

Reddy, a 1964 batch officer of the Indian Administrative Service, has been trying for the last six months to preempt the menace of “hot FII flows” and had even suggested a tax on these as a deterrent some time ago. In the process, he has attracted both kudos and flak. Admittedly, no RBI Governor before him has had to face such a situation— high GDP growth rates, rising crude oil prices, appreciating rupee, hot inflows and record levels of foreign exchange—that he has, since he landed in the corner room of Mint Street in September 2003. But his biggest tests lie ahead, before he completes his five-year term in September 2008. For one, he has to contend with rising inflationary pressures due to soaring crude prices and more FII money pouring into the economy.

With general elections round the corner, Reddy will be under pressure to keep the rupee from appreciating further (as it will cripple exports and result in job losses) as well as maintain a benign interest rate environment in order to facilitate consumption and growth. And given his track record, it seems likely that he will do whatever his political masters tell him to do.