D. Subbarao, an advocate of higher interest rates as the top bureaucrat at the finance ministry, now has the chance to turn his words into action.
Policy signals? Subbarao had said on 29 July that raising rates was the ‘obvious’ answer to control surging prices. Photo: Reuters
Finance minister P. Chidambaram on Monday named Subbarao, 59, to succeed Y.V. Reddy as governor of the Reserve Bank of India (RBI). Raising rates is the “obvious” answer to surging prices, Subbarao had said on 28 July. He brushed aside questions about policy on Tuesday.
The appointment comes two weeks after the government’s chief economic adviser, Arvind Virmani, urged RBI to tighten policy to bring inflation down from a 16-year high.
“Governments have lost elections in the past on inflation,” said Maya Bhandari, senior economist at economic forecaster Lombard Street Research Ltd in London. Subbarao “needs to be much tougher with monetary policy” than Reddy was.
The Bombay Stock Exchange’s benchmark Sensex index gained 3.8% to end at 15,049.86 points on Tuesday, while the yield on the key 10-year bond declined 1 basis point to 8.61%. Hunderd basis points equals one percentage point. The rupee declined 0.5% to 44.40 per dollar.
Reddy’s five-year term ends this week. He’s been raising borrowing costs since 2004 to prevent the world’s fastest growing major economy, after China, from overheating. Inflation surged to 12.6% last month after the government raised fuel costs to cut its subsidy burden.
Prime Minister Manmohan Singh, who announced a 21% salary increase for about five million government employees last month, is reaching out to voters with pre-election handouts. In February, he waived $17 billion (more than Rs75,000 crore today) of farm loans. Such spending can stimulate consumer demand and fan inflation, former RBI governor C. Rangarajan had said last month.
India’s inflation rate jumped to more than 12% from 8.75% in three months, forcing Reddy to raise the central bank’s key repurchase rate to 9%. Reddy, 67, also raised the cash reserve ratio, or the funds lenders need to set aside as reserves, by 4 percentage points to 9% since December 2006.
An engineering graduate from the Indian Institute of Technology before he joined the civil service, Subbarao was also deputed to the World Bank, where he was lead economist between 1999 and 2004 for public finance in Africa and East Asia. He holds a masters degree in economics from Ohio State University and was a Humphrey Fellow at the Massachusetts Institute of Technology. He got his doctorate from Andhra University.
Subbarao has to battle soaring inflation at a time when India’s record economic growth threatens to be undone by higher borrowing costs. The country’s $912 billion economy grew 7.9% in the three months to 30 June, the slowest pace since 2004, the government said on 29 August.