Reserve Bank of India governors should be seen and not heard. But there are occasions when they have to be heard, such as bi-annual monetary and credit policy announcements. The release of the India Development Report by the Indira Gandhi Institute of Development Research, however, is not such an official occasion. It is impossible to distinguish Mr Y.V. Reddy?s personal views from the RBI?s official stance. Foreign direct investment is preferable to foreign institutional investment, and FDI in infrastructure is preferable to FDI in consumer goods. On that, everyone would agree with Mr Venugopal Reddy. While that might be true, short of improving the FDI policy environment and infrastructure sector policies, is there any way the government can, or even should, engineer such inflows? In principle, FII inflows are unstable and are described as volatile and hot money.

Arguably, the east Asian currency crisis would not have snowballed had several economies not persevered with unrealistic and over-valued exchange rates. Given the returns that Indian markets fetch, the best hedge against portfolio investments are sensible exchange rate and interest rate policies. Domestic investments in selected stocks are no less hot. But should the Securities and Exchange Board of India propose a tax on investments in stocks of companies that are subject to corporate misgovernance? The quality of portfolio investments is best ensured by the market. While Tobin-type taxes on short-term portfolio flows or foreign exchange transactions have been toyed with, they have not worked and have only offered arbitrage opportunities. This is true not just of price-based measures like taxes, but of quantitative caps on FII inflows as well, also mentioned by Mr Reddy, in addition to a possible review of registration norms as FIIs. The finance minister?s intervention and clarification led to the RBI governor changing his stance within a few hours. In the process, both the RBI and North Block have ended up with some egg on their faces. While this underlines the lack of coordination between the finance ministry and the RBI, undesirable in a situation where the RBI is not a truly independent Central bank, perhaps the RBI governor will learn to be more careful in the future. Mr Reddy has no personal views until his term is over. Having served in North Block, Mr Reddy should have known better.