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New RBI chief says inflation first priority
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Reuters on September 07, 2008 09:08:00
 
Newly appointed Reserve Bank of India Governor Duvvuri Subbarao attends an
official ceremony before taking charge, at the RBI head office in Mumbai,
Friday, September 5. (AP Photo)
MUMBAI, September 6 (Reuters): New Reserve Bank of India (RBI) governor D.
Subbarao said checking inflation, which is running above 12 percent annually,
was his immediate priority, signalling he was set to maintain the firm
anti-inflation stance of his predecessor. Analysts expect Subbarao, who took
over from Y.V. Reddy on Friday, to keep monetary policy tight after recent
aggressive rate increases by his predecessor, with inflation at its highest
since the current price series began in the mid-1990s.
Government bond yields ticked up after his comment as the market judged there
was no change in policy stance. Annual inflation, as measured by wholesale
prices, has eased from a high of 12.63 percent in early August to 12.34 percent
later in the month, but many economists say price pressures remain and expect it
to peak late in the year at 13-14 percent.
“His comments hint at the continuation of the monetary policy stance
established until now,” said Indranil Pan, chief economist at Kotak Mahindra
Bank. “He is unlikely to relent on tight interest rates until inflation comes
close to the central bank’s stated objective of close to 7 percent by the end
of March.” The RBI raised interest rates three times in June and July to calm
price pressures and inflationary expectations, taking its key lending rate to a
seven-year high of 9.0 percent.
It has also raised banks’ reserve requirements a number of times this year to
cut cash supplies in the banking system. “The immediate priority for me as the
Governor of the Reserve Bank of India will be to manage inflation and anchor
inflationary expectations,” Subbarao told reporters just after taking charge
at the central bank’s headquarters in Mumbai. The yield on the benchmark
10-year government bond ended up 2 basis points on the day at 8.49 percent after
his comments.
The rupee dipped to its lowest since December 2006 at 44.75 per dollar , but
dealers said the fall was driven by concerns about fund outflows from the
weakening stock market. Subbarao, 59, was previously Finance Secretary at the
finance ministry in New Delhi and said in June that demand management must be
part of the solution in tackling prices. “The kind of statements the new
governor has made as the finance secretary, it appears he is very much in favour
of a tight monetary policy,” said Abheek Barua, chief economist at HDFC Bank.
“He sees monetary policy as the first line of defence against inflation.”
The next rate review is on Oct. 24 and analysts say lower inflation gives him
time to assess the price and growth outlook. India’s economy, Asia’s third
largest, is slowing from a rapid clip of 9 percent and above in the past three
fiscal years, with annual growth in the June quarter at 7.9 percent. Prime
Minister Manmohan Singh, on a trip to southern India, said India expected its
economy to grow at about 9 percent a year in the next few years.
“To ensure that this growth process is not inflationary we must step up
productivity and increase output,” he said. Barua said inflation pressures
were dying down and money supply growth was moderating. “We may see a less
aggressive stance in the next policy,” he said. Subbarao has been appointed
for three years at a time when India is striving to deepen and modernise its
financial markets and is scheduled to make a review of the banking sector in
2009. He made clear financial sector reforms would also be high on the agenda.
“The priority in the short to medium term will be of course to pursue
financial sector reforms in the context of financial stability, price stability,
and above all with an ear firmly to the ground on the real sector reforms,” he
said.