Mumbai: A change of guard at India’s central bank will not usher in a change of policy.
Reserve Bank India (RBI) governor D. Subbarao on Tuesday said “demand management” will continue to remain high on the bank’s agenda to tame inflation which is at a 16-year high. There will be no change in the the twin objectives of RBI’s monetary stance—dampening demand and anchoring inflation.
In his first interaction with media, Subbarao, who took over his new assignment last week, said for sustained economic growth, it is essential that “inflation expectations be contained”.
Also see: Full text of D. Subbarao’s statement
His predecessor Y.V. Reddy raised the policy rate by 125 basis points and banks’ cash reserve ratio (CRR) or the proportion of cash that commercial banks need to keep with the central bank, by 150 basis points since the beginning of fiscal 2009 to rein in rising inflation. One basis point is one-hundredth of a percentage point.
Cost conscious: D. Subbarao said ‘demand management’ will continue to remain high on the bank’s agenda to tame inflation. Ashesh Shah / Mint
RBI, according to Subbarao, will monitor the situation “closely and continuously” and take “appropriate” action.
The bond market felt the new governor might not go for another rate hike soon. The yield on the 10-year bond dropped by 6 basis points to 8.39%, a three-month low, as prices rose after his comment. Bond yield and price move in opposite directions.
A. Prasanna, chief economist of ICICI Securities Primary Dealership Pvt. Ltd, a firm that buys and sells government securities, said: “I feel it’s a continuation of the previous policy as the governor has clarified that the focus will be to contain inflation.”
Prasanna does not expect a rate hike in October but said an increase in CRR hike cannot be ruled out. RBI will announce its mid-year review of monetary policy in October and Subbarao will meet senior bankers later this month to take stock of the situation.
“The inflation momentum is coming down,” Subbarao said. According to him, crude prices are moderating and the outlook on domestic food prices is stable but RBI will closely watch the international scenario, commodity and food prices because high input cost may not allow food prices to moderate.
“It is too early, I believe, to take a call on inflation. However, I do have some sense of satisfaction in moderation of the WPI (wholesale price index) numbers,” Subbarao said.
WPI-based inflation, which rose to 12.63% in the beginning of August, has come to down to 12.34% as on 23 August.
J. Moses Harding, executive vice-president and head (wholesale banking group), IndusInd Bank Ltd, said the market was expecting a rate hike in October policy but after the governor’s “comforting statement on inflation”, it believes the rate hike could be delayed.
Andhra bank chairman, R.S. Reddy, too, said there was nothing hawkish in the new governor’s statement.
S. Srinivasa Raghavan, vice-president and head, treasury, IDBI Gilts Ltd, said one cannot read too much into the governor’s initial statements but there is no doubt that RBI will continue with its fight against inflation.
In response to a question on monetary tightening, Subbarao said: “I don’t have a crisp answer to this question. There are, as they say, several known unknowns. We will have to watch the impact of the measures already taken.’’
Despite the high inflation rate, the Indian central bank is optimistic about growth prospects of economy. “The structural India growth story is still in-tact and credible,” Subbarao said. RBI brought down its growth projection from 8.5% to 8% in its quarterly review of monetary policy in August. The economy has grown at 7.9% in the first three months of fiscal 2009, its lowest in past four years.
Financial sector reform and real sector reform are on the priority list of the new governor, with a few caveats. “In moving forward, we will draw from the lessons of global experience of the recent period,” he said.
Subbarao said “a lot has been done” for capital account convertibility and “it’s important on the agenda of the government and RBI.” On the proposed opening of financial sector in 2009, Subbarao said, “There will be a review in 2009.”