Keeping inflation under check is a top priority for Duvvuri Subbarao, the new governor of the Reserve Bank of India, who also wants to keep financial sector reforms high on the agenda.
The first remarks of Subbarao, who took charge on Friday,point to a continuation of the monetary stance of his predecessor, YVenugopal Reddy -- meaning interest rates will unlikely soften anytime soon.
"The immediate priority for me as the Governor of the Reserve Bank of India will be to manage inflation and anchor inflationary expectations," Subbarao said.
His predecessor repeatedly increased interest rates and ordered banks to hold more and more cash in reserves in a bid to bring down the inflation rate, which is hovering over a worrisome 12 per cent.
There have been calls from industry to cut interest rates as prices have lately show signs of easing – the inflation rate fell for two straight weeks, from 12.63 per cent in the week ended August 9 to 12.34 per cent as on August 23.
The next scheduled rate review is due in late October, but few expect Subbarao, 59, who was previously finance secretary in the Government of India, to go easy on monetary policy.
The RBI raised interest rates three times in June and July to calm price pressures and inflationary expectations, taking its key lending rate to a seven-year high of 9.0 percent.
The monetary tightening has begun to hurt the broader economy’s expansion, which averaged 7.9 per cent through the April-June quarter – the slowest since 2004.
Subbarao’s appointment also comes at a time when the country is striving to deepen and modernise its financial markets and is scheduled to make a review of the banking sector in 2009. "The priority in the short to medium term will be of course to pursue financial sector reforms in the context of financial stability, price stability, and above all with an ear firmly to the ground on the real sector reforms," he said.
Analysts expect him to further liberalise the investment regime.
“We might see opening up of a few things like inviting more capital into the banking system,” said Ashwin Parekh at Ernst & Young. “RBI might look at FDI flows rather than FII flows in the financial system.”
Parekh said microfinance and financial inclusion could see some action as Subbarao “brings with him his microfinance background and so he has the perspective.”