Former RBI Governor YV Reddy said, “Since currency holders are mostly the market intermediaries, there is an element of volume play in the market. Since higher volume brings in higher fees, we need to look into this and introduce banking transaction charges or Tobin tax to curb this volatility”. Former Reserve Bank of India (RBI) governor YV Reddy on Wednesday called for taxing banks saying such a step can curb volatility in the entire financial markets, especially in the currency segment, reports PTI. “Tobin tax should be imposed to control currency volatility as there is an element of incentives behind these wild fluctuations in the forex markets,” Mr Reddy told reporters on the sidelines of a meet on the financial stability organised by the RBI set-up Centre for Advance Financial Research and Learning (Cafral) and the Bank for International Settlement (BIS) here. Explaining further, he said, “Since currency holders are mostly the market intermediaries, there is an element of volume play in the market. Since higher volume brings in higher fees, we need to look into this and introduce banking transaction charges or Tobin tax to curb this volatility.” The former central banker is credited with firmly anchoring the domestic banking system from the 2008 global financial meltdown. Speaking to reporters, former IMF deputy managing director John Lipsky also supported the view saying taxing banks can help curb the irregularities in the system. Ever since the 2008 crisis, Mr Reddy has been a vocal critic of the way banks are being run and has been calling for more prudential steps to curb mal practices in the system. He also called for simpler financial products. The last time Mr Reddy had called such a tax was way back in 2005, when he was at the helm of the RBI. His statement then had resulted in markets getting into a free-fall and was roundly criticised by all market participants. In his 2005 speech, the concept was not in acceptance in global policy circles. But he had underscored the need to constantly revisit the relevance of the objectives, desirability and the feasibility of Tobin tax. He had said the tax could be applicable not only to currency markets, but also to other markets, particularly in the aftermath of the global financial crisis. The tax on cross border transactions was named after its original proponent American economist James Tobin, who in the 1970s, had argued that a tax on short-term capital flows would make exchange rates reflect long-term fundamentals relative to short-term expectations and risks, to some extent.
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