The Hindu Business Line : Taking fresh guard

The succession at Mint Street is no routine change of guard principally because the environment is a daunting one. It is also a time of great opportunity for change.

That the new Reserve Bank Governor, Dr Duvvuri Subbarao, who takes over from Dr Y.V. Reddy on September 5, will have his work cut out on Mint Street goes without saying. That financial and monetary policy reforms and innovative regulatory mechanisms are needed to cope with India’s rapid integration into the global financial architecture is also evident. What is not, however, is the complex set of circumstances in which these challenges operate. The succession at Mint Street is no routine change of guard principally because the environment is a daunting one for any policymaker. It is also a time of great opportunity for change.

Consider inflation. The current bout of stubborn prices has its root in not just supply constraints, as has been the case in the past, or in demand pressures, as is usually the case in the western economies but a mixture of both with some more potent ingredients that the RBI has identified in its recently released Annual Report. High capital inflows have added immensely to liquidity as has the government penchant for off-budget means to fund its various programmes. Heightened market borrowings have added to liquidity and demand pressures and rendered monetary policy that much more difficult. The central bank’s frequent upward revisions of interest rates or “withdrawal of monetary accommodation” in its fight against excess liquidity has added to costs that have already risen because of high energy and raw material prices. The industrial sector now frequently complains of rising input costs and the effect on output has already begun showing in declining numbers. True, growth is still estimated at around 8 per cent, but Dr. Subbarao will need to reflect just how much room that gives him to harden interest rates should double-digit inflation persist. Underlying the output numbers is a sense of foreboding that infects business confidence, so unlike the time when Dr Reddy took over five years ago. The new Governor inherits declining industrial activity marred by rising prices and robust capital inflows with a widening current account deficit. These call for challenging monetary and exchange rate policies.

The RBI itself can no longer keep its doors shut to change. It needs to rethink the portfolio of supervisory functions with a view to sharpening its focus on monetary and exchange rate management. Certain key issues need to be revisited; should the debt market, cooperative banking and even commercial banking supervision pass to independent authorities to create a leaner central bank? RBI must also consider new human resource policies that permit lateral entry at senior positions so that some fresh winds blow down its corridors. Some of these issues have been around for decades but never as relevant as today.

Related Stories:
Subbarao to head RBI
Top priority for inflation management: Finance Secretary

More Stories on : Editorial | RBI & Other Central Banks | People

Article E-Mail :: Comment :: Syndication :: Printer Friendly Page

Stories in this Section
Taking fresh guard

Long and short of the new Delhi runway

India’s nuclear deal: A bridge too far?

Is it time for ‘Basel III’?

Sir, are you Gazetted?

Volatile oil prices

Too much latitude