Dr KC Chakrabarty is not the first to roil markets with comments. But he is the first Deputy Governor to pay a stiff price. Successive RBI governors and deputy governors have easily got away for very serious lapses of judgment or inaction

Evidence that Dr K C Chakrabarty, Deputy Governor of the Reserve Bank of India (RBI) may have been singled out for humiliation continues to mount. On 5th August we wrote that he might have been the victim of a deliberate set up through an exceptionally savage piece by Newswire 18 (belonging to the TV18 group) that exaggerated the impact of his statement on the bond market. His crime: he allegedly expressed an off-the-record view that the monetary policy should have been more aggressive in hiking interest rates and hinted that the Finance Ministry really dictated decisions.

Dig just a little into the RBI's recent past and you find that the "loose cannon" epithet that described Chakrabarty could have just as easily fit one of our most illustrious Governors ever - Dr Yaga Venugopal Reddy. Dr Reddy is correctly lauded around the world for his tough stand against mindless financial liberalisation, which ultimately protected India from the global financial crisis. At Moneylife, we are especially aware of his phenomenal contribution to tightening customer service regulation of banks through personal interest and commitment. If the banking sector today is far more responsive to customer complaints than insurance or capital markets, it is because of the systems he helped put in place. It is also because of him that the Banking Ombudsman scheme works effectively for must customers, unlike the grievance redressal mechanism of the capital market and insurance regulators.

But if Dr Y V Reddy had been dubbed a 'loose cannon' and humiliated on the basis of media reports, he may never even have become the Governor. In August 1997, as Deputy Governor, Dr Reddy unleashed massive turmoil in the currency market when he told forex dealers at a conference in Goa that the rupee was overvalued compared to the then real effective exchange rate. The RBI faced severe heat for a while, but he wasn't gagged nor were his powers curtailed. In fact, he went on to become RBI Governor, despite rumours about his uneasy relationship with former Governor Bimal Jalan under whom Reddy worked.
 
Even as the Governor, in January 2005, Dr Reddy caused another panic in the capital market with his speech at the Indira Gandhi Institute of Development Research where he spoke of a cap on Foreign Institutional Investment (FII). It sent the market into a panicky downward spiral forcing the then finance minister to make a public statement to cool things down. In fact, Governor Reddy had to call an urgent press conference and issue a retraction that very evening.

Also, let us also not forget Global Trust Bank, which was given a clean chit by the RBI in 2002. Many of us continue to believe, with adequate evidence, that GTB's cowboy banking and nexus with Ketan Parekh and his corporate cronies would never have happened but for the kid glove treatment by the RBI and the systematic suppression of inspection findings until its ultimate collapse in 2004.
 
No deputy governor ever paid the price for such a colossal failure in supervision.Again, Dr Reddy was not the only Deputy Governor who was protected by the establishment. In 1997, Governor C Rangarajan divested the then Deputy Governor S P Talwar of his key portfolios, which were later restored during Governor Bimal Jalan's tenure. There were whispers that it was Talwar who was responsible for granting provisional banking license to the dubious CRB Group, which later went bust. But it was a quiet move, not the public humiliation that Dr Chakrabarty was subjected to.In fact, it has always been our charge that senior RBI officials have done more damage to the system by their failure to initiate timely action and have got away without any censure. When the 1992 scam happened only Governor S Venkitaraman faced some heat. When the Ketan Parekh scam occurred, it was discovered that the RBI had completely failed to regulate Overseas Corporate Bodies (OCBs), some of which had been set up with a $10 capital. Only the system and hapless investor paid a price. When finance companies were running amok in the 1990s, a sudden change in rules destroyed the entire sector, but RBI's decision makers were never questioned.

Nobody in the RBI paid a price for deposit-taking plantation companies that were essentially running a Ponzi scheme. Even today, the loan-against-gold schemes are mushrooming to dangerous levels without inviting any scrutiny from the RBI.  At current gold prices, it is a time bomb that is bound to explode when gold prices crash. But is the RBI paying attention? It is passionately lobbying to protect its turf in the name of protecting its autonomy.

In fact, what we need today is more sunlight and transparency in the RBI's decision-making process on regulation, supervision and also monetary policy. As we said earlier, monetary policy discussions must be put in the public domain with a lag, so that policy makers are allowed to have divergent views and policy decisions are the result of a true debate. What better time to have an open discussion and to push for transparency in RBI itself when Governor D Subbarao is writing repeatedly to the government to preserve RBI's powers.