RBI?S new chief, Duvvuri Subbarao, has a tough task ahead of him on four fronts: Enabling India?s integration into the world economy, undertaking financial sector reforms to achieve efficiency and competition, reforming RBI?s role and functions, and delivering low and stable inflation. RBI governors should, of course, be judged by deeds and not words. Yet, his statement on Tuesday has some interesting aspects. On inflation, he is right to focus on the goal of delivering low and stable inflation as one of the four key performance indicators. This requires three things. First, for RBI to deliver results on this front, strengthening monetary policy transmission is essential. This requires implementing the Patil, Mistry and Rajan reports to get a well functioning bond-currency-derivatives nexus. This would enable RBI to behave like other central banks, where millimetric changes in interest rates rein in demand and deliver low inflation. Second, top quality intellectual work is required on understanding and forecasting inflation, and achieving a quantitative sense of how monetary policy influences inflation. Third, RBI will need to evangelise to politicians and the economy at large, that the path to low and stable inflation inexorably requires getting RBI out of manipulation of the currency market.
Subbarao has done well to endorse the analytical foundations of the Patil, Mistry and Rajan reports. He is not in a state of denial, claiming that all is well with Indian finance. Now, a time-bound implementation programme is required. Roughly 80% of the work can be done without legislation. With good coordination between the ministry of finance, RBI and Sebi, it should be possible to get the bulk of this done within two years. This would inject a breath of fresh air into finance. It would be comparable with the achievements of the early 1990s in the real sector in terms of injecting competition and dynamism. At the same time, new legislation will be required on many fronts. The debt management office probably requires a new law. The Mistry and Rajan reports have emphasised the need for a Financial Services Modernisation Act. At the very least, the securities industry needs to be placed on a sound legislative foundation with principles-based regulation by Sebi. Finally, the goals: the independence, transparency and accountability of RBI, need to be enshrined in new legislation. The implementation roadmap needs to integrate all these elements so as to achieve a quantum leap over the next two to three years.