Take rating agencies seriously, says former governor of RBI

NEW DELHI: Rating agencies must be taken seriously by countries as financial markets are likely to react to a possible downgrade of their sovereign rating, said Dr YV Reddy. The former governor of RBI, who has recently been appointed Chairman of the 14th Finance Commission, was speaking to ET in an exclusive interview just before the launch of his book, 'Economic Policies and India's Reform Agendas: New Thinking' in the capital.

Countries like the US can shrug off the threat of a downgrade or even an actual downgrade because financial markets are not affected by whatever the rating agencies might say, but that is a luxury not available to most other countries, Reddy said.

Rating agencies might have been caught wrong-footed in the past but that is immaterial. What matters is how financial markets react to their action. If financial markets are going to react then one needs to be concerned, not otherwise, Reddy said.

With two rating agencies, Standard & Poor's and Fitch, holding out a threat of a potential downgrade of India's barely investment grade rating, Dr Reddy's words have a special resonance for the government.

A strong votary of de-centralised decision making, Dr Reddy has in the past spoken of the advantages of empowering states and reducing the downside risks of centralised policy-making. Asked whether he still believes in greater de-centralisation, he reiterated that he believes there are many things that are best done locally. Competition between states is good up to a point.

States should be given the freedom to experiment and tailor programmes to suit local conditions. Standard procedures and templates can be laid down but beyond that states should have some flexibility. Whether these views will find reflection in the report of the 14th Finance Commission when it submits its recommendations by October 2014 remains to be seen. He would bring his knowledge to bear on the working of the Commission, he said, but would guided by the Commission as a whole.