Former Governor of Reserve Bank of India Discusses Central Banking

The global financial crisis of 2008 pushed a rethinking of the approach to monetary policy and the role of central banks in advanced economies, Dr. Y.V. Reddy, former governor of the Reserve Bank of India, told students at the Yale School of Management on September 27. He added that the rethinking in many ways validated the approach of the Reserve Bank of India to monetary policy and the regulation of financial sector. 

Reddy spoke as a guest lecturer in the Monetary Policy course taught by Bill English, senior lecturer in finance. Monetary Policy is an advanced macroeconomics course with a focus on policy over the past decade, including the implications of financial crises, the effects of unconventional monetary policy tools, and the links between monetary policy and financial stability.

A required course for students in Yale SOM’s new Master of Management Studies (MMS) in Systemic Risk program, the course is also a popular elective for MBA students. The course features a visiting lecture series designed to let real-world practitioners share their views with students.

During his talk, “Art and Science of Central Banking: A Practitioner’s Account,” Reddy noted that, prior to the crisis, improvements in economic theory and modeling had led economists and policymakers in many countries to increasingly view central banking as a somewhat circumscribed, autonomous, and predictable undertaking, its main focus being to ensure price stability, Reddy said. “The mainstream thinking was central banking was gradually becoming more of a science and less guesswork,” he explained.

However, Reddy went on to outline the manner in which monetary policy became more of an art than a science after the experience with the global financial crisis. In addition, Reddy explained how in the emerging market economies, monetary policy has always been more of an art than a science. However, they have been making efforts to improve the scientific basis for forecasting to enable informed decisions. 

Reddy shared his experiences in the run-up to the financial crisis at the Reserve Bank of India, working closely with Dr. Rakesh Mohan (now at Yale’s Jackson Institute for Global Affairs) as his deputy governor, and for some time as secretary in the government of India. He described how the Reserve Bank of India’s approach—including capital account management, counter-cyclical macroprudential regulation, regulatory oversight over non-bank financial companies, and reluctance to permit derivatives—helped India’s financial system to be largely protected from the serious consequences of the global financial crisis. 

The financial crisis of 2007-09 forced economists to reconsider the role of central banks, and how dependent monetary policy is on other social and economic factors. These factors were particularly important in an emerging market economy such as India, operating in a globalized world.  “The moment you add financial stability as an objective, other actors get involved,” Reddy said, noting the greater complexity of policymaking post-crisis. 

Other speakers scheduled for the course this semester include Athanasios Orphanides, former governor of the central bank in Cyprus and member of the Governing Council at the European Central Bank, and Trish Mosser, former chief economist at the Office of Financial Research.

About the Event

Dr. Y.V. Reddy, former governor of the Reserve Bank of India, speaks to Yale SOM students during Bill English’s class Monetary Policy. Reddy’s talk is titled “Art and Science of Central Banking: A Practitioner’s Account.”

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