Reserve Bank of India governor D Subbarao said on Tuesday that India will not slow down on financial reforms, but would re-calibrate the roadmap for reforms, given the backdrop of the global crisis.
?There has been speculation, apprehension and some thinking that India might slow down on reforms, particularly in the financial sector, because of what has happened during the crisis. I believe that is mistaken thinking. We will not slow down on reforms, but we will re-calibrate the roadmap for reforms reflecting the lesson of the crisis,? he said.
Subbarao was participating in a lecture programme of Raghuram G Rajan, a University of Chicago professor and former chief economist at International Monetary Fund (IMF).
Rajan said the RBI cannot do much about the deficit, but it can suffer substantial loss of credibility if it monetises it.
?Any monetisation would add further to inflation expectations. RBI should distance itself more from the government to preserve credibility. It should shed responsibility for managing government debt and have a clearer focus on inflation,? he suggested, adding that RBI should create a more formal committee structure for interest rate determination, as well as more technical input into process of rate setting.
?But formal independence ultimately can be overridden and RBI should create more awareness why independence is necessary,? he said. He further explained that the government needs substantial resources to fund deficit. ?Unless the public is willing to hold substantially more money, monetisation will cause serious inflation. In addition, competition for resources will increase real rate of interest, resulting in a hike in nominal long-term interest rate,?? he cautioned.
According to him, everything links back to the banking system and then to the government. The domestic finance companies need more shock absorbers and ways of spreading risk. There should be a corporate bond market and securitisation market, he said. ?The lesson from this crisis is not that we should stop having markets,?? he added.
Rajan said India escaped the crisis through a combination of management, structure and luck. Management post-crisis was superb and appropriately measured, he said, adding that the pre-crisis policies of former governor YV Reddy against capital inflows, especially to the real estate sector and against rapid foreign bank expansion, were timely.
?There was a trade-off?stability vs growth,?? he said. ?However, the country has other weaknesses like a weak fiscal position. The RBI ultimately is under executive and resolution infrastructure is untested,? he argued.