Bankers and economists expect the continuity of the hawkish policy by the Reserve Bank of India (RBI) in curbing double-digit inflation under the newly appointed governor, Duvvuri Subbarao, who was finance secretary in the ministry of finance before being named as the governor of the central bank.
T Bhoumik, chief economist, Reliance Industries said, ?The new RBI governor is a monetarist and has good background needed to tackle an issue like inflation. As a finance secretary, he is well-versed with the current inflationary scenario in the country. That?s going to be advantageous for the RBI in taking remedial steps to curb inflation.?
?On July 28, for example, Bloomberg quotes him as saying that raising rates is the ?obvious? answer to surging prices. As such we are leaving our interest rate calls unchanged, envisaging 50bps of repo rate hikes and 50-75bps on the cash reserve ratio (CRR) by the end of calendar 2008, with rate reductions only beginning in the second half of calendar 2009 when growth may have slipped below 7%,? said HSBC?s Robert Prior-Wandesforde.
According to Prior-Wandesforde in most countries, Subbarao?s appointment would be seen as being effectively designed to put a halt to the progressive monetary tightening that governor YV Reddy has implemented since he took the job in September 2003.
Indeed, in his five year stint, Reddy has only cut rates once (lowering the repo rate from 7% to 6% in March 2004), while overseeing a doubling of the CRR to 9%, a 150bp increase in the reverse repo to 6% currently and, eventually, a rise in the repo rate also to 9%. The situation is, however, potentially rather different in India, at least at the moment, he said. Time and again, over recent months, the government has made it clear that its top priority is reducing inflation (the preferred WPI measure currently stands at 12.4%), as strong price increases are widely viewed as a bigger vote-loser than weaker GDP growth (which slowed to 7.9% in April-June this year from 8.8%), explains Prior-Wandesforde.
KC Chakrabarty, chairman & managing director, Punjab National Bank, said the new RBI governor is an excellent choice since as a finance secretary he had immense exposure to the state of the economy.