The new boss at Mint Road, D Subbarao, stuck a buoyant note on India?s growth story, saying RBI is keenly aware of the need for financial sector reforms, including a review of opening up the banking sector to foreign competition. Addressing his maiden press conference after taking over as the central bank governor from YV Reddy, he also described the present downturn as a cyclical correction.
Subbarao said the government and RBI would soon issue a comprehensive report of the committee on financial sector assessment. Highlighting the contribution made by the financial sector to India?s growth, Subbarao asserted, ?The liberalisation and development of the financial sector over the last few years has been a key factor in financing our 9% growth.? But while lauding the progress of the financial sector, Subbarao also made his priorities clear: ?The task ahead is formidable. The sector has to become more competitive, efficient and forward looking.?
For the first time, RBI on Tuesday accepted the roadmap of the Percy Mistry report to make Mumbai an international financial centre, along with the RH Patil committee on debt market reforms and the forthcoming Raghuram Rajan committee report. ?What we want to do is use the advice to draw a roadmap that responds to our immediate and medium-term needs,? the governor added.
The emphasis on growth implies that in the October review of monetary policy, Subbarao could temper inflation concerns. He expressed happiness that inflation had recently moderated, going by WPI figures, but acknowledged that it was too early to take a call. He said he would decide on whether to hike interest rates based on an analysis of the impact of the measures already taken: ?We will be watching the drivers of demand (and) be mindful of the implications of our monetary stance on the growth prospects.?
The governor made clear that RBI would draw lessons from current issues gripping global financial markets, yet to ?sustain and accelerate India?s growth story, financial sector reform aimed at improved efficiency and financial stability will remain important?.
?The current high level of domestic inflation reflects a combination of supply-side pressures, as well as demand-side factors. It is not surprising that after five years of 9% growth, supply constraints will begin to emerge,? he said. ?Though demand is not the main problem, in the absence of further flexibility on the supply side, demand management has to be part of the solution. Dampening demand and anchoring inflation expectations has been the logic behind Reserve Bank?s monetary stance,? he clarified.
According to Subbarao, India?s growth was investment driven and that investment as a share of GDP has increased from 25% in 2002-03 to 38% in 2007-08. Of this 13-percentage point increase, as much as 10 percentage points was financed domestically through higher household, public sector and corporate savings. He also said financial sector reforms were not an end in themselves. ?They have meaning and relevance only if they are anchored in real sector objectives,? he added.