New Delhi: Former RBI governor Y. Venugopal Reddy, who has earned a global reputation for his acumen as a central banker, has admitted that if he were still head of the central bank, he would have quietly conveyed to the Centre his inability to carry out demonetisation on the scale announced by Prime Minister Narendra Modi.

In an interview with The Wire on Saturday, Reddy readily conceded that it is the Centre’s prerogative, as a sovereign, to take the decision to demonetise. However, he would have told the prime minister that it was impossible to effect a quick replacement of currency on such a massive scale. “First I would have tried to impress upon the government that it should withdraw only Rs 1000 notes so as to minimise the disruption. If the government still wanted to go ahead with removing 86% of currency in circulation I would have conveyed my inability to execute it,” he said.

Reddy also pointed out that he would not have publicly protested or resigned immediately because the Centre has “every right” to take a decision on demonetisation. The former RBI governor said he would have simply expressed his professional disagreement over the feasibility of the move and probably would have proceeded to go on sick leave thereafter, paving the way for some other senior central banker to preside over the RBI board meeting that would pass the resolution for withdrawal of old currency notes.

The former governor was, however, clear he wouldn’t have resigned because he cannot per se question the decision of the sovereign. “That would not be in order. However, I have every right as a professional to withdraw from its implementation,” said Reddy.

The former governor broke his silence a week ago when he told TV channel CNBC that the “institutional identity of the RBI has been damaged. It is not about individuals but about the credibility and reputation of the central bank.”

“Surveys around the world over have shown that the central bank figures after the army in terms of perception as a custodian of society’s trust,” Reddy told The Wire. “Central bank is regarded as a custodian of society’s trust in money and finance. This precisely why all central banks regard risk to reputation as the highest form of risk. There is also operational risk in central banking but reputational risk is accorded the highest priority for obvious reasons,” Reddy added.

Explaining the concept further, he said reputational risk is not just about what the central bank does. It is mainly about what people think the bank can do. Reddy clearly implied that demonetisation on such an unprecedented scale could alter what people think the RBI might do in the future.

He said that in Germany there is a famous saying that most Germans believe in God but all of them have total trust in the Bundesbank. Of course, this reputation of trust was built over several decades after the German economy was devastated by hyperinflation in the 1930s.

Talking about the economy’s recovery after demonetisation, he said the biggest challenge will be restoring the working capital cycle of small and medium businesses, which could currently be staring at insolvency. A recent survey of small industries by the State Bank of India shows that nearly two-thirds of the sector has suffered output loss ranging from 40% to 50%. Bringing back the sector’s working capital cycle is urgent in this very context.

Earlier Reddy had told The Wire that up to 30% of the working capital of small businesses comes from the black economy. So if all such monies are assumed to be deposited in the banks, the challenge will be for banks to deliver this money back to small businesses to restart their working capital cycle.

The question, Reddy points out, is whether “bank managements are up to this task”.