D Subbarao, the new helmsman at the Reserve Bank of India (RBI), wants to keep inflation under check. This was also the overriding objective of the outgoing Governor, YV Reddy, under whose watch inflation in the economy tripled to 12.34 per cent. The new Governor’s immediate priorities to manage the price rise, thus, promise continuity rather than change at Mint Street. Whether this implies a tighter monetary stance that raises interest rates, however, depends on what former US Defence Secretary Donald Rumsfeld termed as “known unknowns”. Mr Reddy’s five-year term hardly saw a cut in rates or the cash reserve ratio that refers to the portion of deposits that commercial banks park with the RBI. Mr Subbarao is unlikely to follow a radically different script.
The new governor’s advantages include the fact that he is a former finance secretary to the government. This augurs well for the relationship between the central bank and the Finance Ministry that did come under some strain during the Reddy era. Simply put, the previous governor wanted to adopt an even tighter monetary stance in hiking interest rates to control inflation. North Block, for its part, was worried about the effect of such policies on lowering growth. But these differences did not come in the way of any of RBI’s measures. The Finance Ministry, too, accepted that if there was to be a price for lowering inflation in terms of lower growth, so be it.
Once the priority of lowering the price rise is addressed, the focus must perforce shift to financial sector reforms. The new governor’s appointment comes when the country is striving to deepen and modernise this sector. Mr Subbarao is, of course, aware of the reform imperative and intends to pursue this objective in the “context of financial stability, price stability and above all with a ear firmly to the ground on real sector reforms”. The utterances of central bankers are notoriously inscrutable but the new Governor’s statements indicate a healthy caution and pragmatism that is worth watching.