Viral Acharya right person for RBI job: Pronab Sen

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Appointment of Viral Acharya as the new RBI Deputy Governor is a good decision as he has done a lot of work in India, says economist Pronab Sen. Speaking to CNBC-TV18, Sen said that going forward, the central bank needs to factor in the availability of money in escrow accounts in its monetary policy. On demonetisation, he said that it has hampered the confidence people have in currency and instruments other than currency which can be used for exchange and transaction purposes will gain traction. Below is the verbatim transcript of Pronab Sen’s interview to Latha Venkatesh & Sonia Shenoy on CNBC-TV18. Latha: Your first comment on Viral Acharya’s choice? A: Excellent choice, I don’t think they could have done better. Viral not only knows the theory he has actually done a lot of work on India as well. So, I think particularly given this whole business of transiting to less cash economy you need somebody who understands finance and understands it well. Viral I think is just the right person for the job. Sonia: If you read some of his earlier interviews etc he has of course co-authored a paper as well with former governor Raghuram Rajan and he once called himself a poor man’s governor Rajan. In that context do you get a sense that he could perhaps have the same kind of rules or systems in place as governor Rajan had with respect to issues like inflation, interest rate etc? A: As far as those are concerned the point that was made with regarding governor Urjit Patel’s positioning on these issues I don’t think that should be changed. However, what will change is that the nature of monetary policy is going to be different because when you have virtual cash floating around the way you think about money in the larger scheme of things they have to be very different from what his experienced in the past. That I feel would have possibly been better than Raghuram Rajan. Latha: If you could add more colour to that virtual cash, you mean more digital transactions can you elaborate, that is perhaps we all need to understand? A: The thing is that a lot of the new digital platforms work off escrow accounts to which transactions are routed. Now in order for you to do any monetary policy you must have some sense of how much is available in these escrow accounts because that is a part of the monetary stock. This is something that you have been integrating to monetary policy. When we are talking about transmission of momentary policy it is going to be a lot more muddy than what it used to be. Latha: I guess velocity of money in the wallets, which is what you are referring to I guess escrowed accounts is perhaps going to be different the money multiplier itself will be different so all that need to factored in? A: The multiplier will be certainly different, but more important than that, the things as far as the old way of thinking about things when we used to work essentially with M0 and M3 that is going to change I don’t know we may have to invent a new M. Latha: I guess others have been on that path before us so we have something to learn from and maybe Viral will bring that to the table. I wanted to ask you even about the banking sector’s problems that has up until October that was the big elephant in the room, now it now even a mouse so it will come back on the after this cash crunch issues are behind us. Would this be the right talent to handle banking sector capitalisation as well as handling bad assets? A: As far as the banking sector issues are concerned I think RBI already had people who are well-versed in the issues – so I don’t think that much of a hand on in terms of Viral’s contribution, but the important issue on key banking sector where Viral will be able to weigh in is that now when you think about the banking sector it roles as an intermediary in transactions is going to become less, but its role in providing finance is going to increase. Now when that happens there is a kind of decisions that banks take in terms of the portfolio is going to change. I at least have no sense of how that going to play out and there are too many imponderables at the moment, but somebody who has a better sense of just then I do is needed. Sonia: In fact, he has made some comments in the past that he is very pro a bad bank in order to clean up the toxicity in the system etc. Anything else as per your expertise what else do you think he could bring to the table now? A: Well, you see what is quite likely to happen is that if there is a reduction in the general sort of confidence and faith in the currency you could actually see other financial instruments being used essentially for exchange and transaction purposes. Latha: Like such as. A: Bills of exchange. There is all kinds of things that can now happen, because I think none of the effects of the demonetisation has done is that it has certainly buffeted the confidence that we had in the currency and I think lot of people are going to be seeking to diversify a way which has implications for monetary policy that we know nothing about. Latha: You mean gold. A: Gold has been there merely as a store of value, but I am talking about short-terms notes that are issued by company. They had all the characteristics of legal tender.