Change of guard at Mint Road: old dilemma, new hope

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: this week, the government made the crucial appointment to the top job at RBI. Some market-watchers had speculated that Reddy would have his tenure extended, but a three-year term was given to Subbarao.

The new governor likely carries a strong tightening bias, according to his recent comments on inflation and interest rates. Although inflation has shown signs of easing in the recent weeks, it is insufficient to stop the central bank from further raising interest rates and cash reserve requirements in the October monetary policy review-the most it can do is to prevent intermittent monetary tightening, says Sherman Chan, an economist at Moody’s.

Inflation apart, the agenda for Subbarao will have many other aspects, which will need RBI's attention.

Explaining the need for pushing reforms fast in the banking sector, RBI says that over the years, banking systems all over the world have witnessed a significant transformation underpinned by various factors such as deregulations, technological innovation and globalisation. These developments have resulted in increased competitive pressures.

Banks, therefore, have been introducing innovative products, seeking newer sources of income, diversifying into non-traditional activities and economising on capital. All these developments have posed several regulatory and supervisory challenges. Highlighting the new trend, the RBI report also mentions a shift in the regulatory focus from micro regulation to macro management based on prudential elements, with a view to strengthening the banking sector and providing it with greater operational flexibility.

The blurring of distinction among banks and non-banks, the emergence of financial conglomerates and introduction of several innovative financial products have also posed several regulatory and supervisory challenges.

Another major challenge is to bring the people who have remained financially excluded within the banking fold, says RBI. However, an assessment of the progress in financial inclusion is hampered by the lack of relevant data/information. The report has also revealed that banks in India have had increased exposure to the infrastructure sector in recent years. However, increased credit intensity of the industry could not be explained by increased exposure to infrastructure alone.