New RBI governor likely to continue with hawkish stance | india | Hindustan Times
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New RBI governor likely to continue with hawkish stance

Finance secretary D Subbarao takes over as the new RBI governor at a time when macro-economic managers and currency administrators are grappling with policy dilemmas to contain price.

india Updated: Sep 02, 2008 21:15 IST
HT Correspondent

It is one change of guard that was most watched out for.

Finance secretary D Subbarao takes over as the new Reserve Bank of India (RBI) governor at a time when macro-economic managers and currency administrators are grappling with policy dilemmas to contain prices and maintain high growth in national incomes.

The central bank has launched an all-round monetary attack on inflation raising key interest and reserve rates several times with YV Reddy, who demits office later this week, strongly indicating that price management would take precedence over growth if a trade-off were to be made.

Analysts expects RBI’s hawkish stance to continue.

Sonal Varma, economist and vice president, Asia Pacific, Lehman Brothers, said the RBI’s stance would depend on the macro-economic outlook.

“Given the inflation and the fiscal situation we do not see any change in the RBI stance, at least for this year,” said Varma.

Inflation has remained above 12 per cent during the past few weeks and the monetary authority has taken a slew of steps since the rate began its upward march in February.

The RBI has hiked the cash reserve ratio (CRR)—the mandatory proportion of money banks have to park with the central bank—12 times or 4.00 percentage points since December 2006 to suck out excess liquidity from the system.

The repo rate, the benchmark short-term lending rate, has been increased thrice since March 2007.

Both the reserve ratio and the repo rate stand at 9 per cent.

“The manufacturing inflation has not fallen and demand side pressures are still there. It is too early to say that the RBI stance will change,” said Varma.

Subbarao, a career civil servant with strong academic credentials, would have his first major assignment as a central banker when he presents the mid-term monetary policy review next month.

Analysts said next month’s policy review would give a sense of what lies ahead.

“The new governor’s first policy would give us whether he is looking at new instruments for liquidity adjustment,” said Ashwin Parkeh, National Leader (Financial Services), of consulting firm Ernst &Young.

Parekh also expected Subbarao to give a new policy direction on non-banking financial companies (NBFCs). “There is a need for the regulator to directly come out and say whether he likes NBFCs or not. In the absence of policy clarity, there is confusion in the market place,” said Parekh.

Analysts expect Subbarao to usher in reforms in micro-finance and financial inclusion, given his background in rural finance as a bureaucrat.

“There is a need for a lot of reforms in the areas of micro-finance and financial inclusion. So far we have just recognised these problems,” Parekh said.