Subbarao, new RBI governor in his first media interview as governor

Duvvuri Subbarao, who took over from Y.V. Reddy as governor last Friday, addressed the media for the first time today. Subbarao's comments were perhaps more moderate than had been expected, with several references to the need for sustaining economic expansion. It seems the monetary tightening period is coming to an end now as he said that inflation expectations must be contained to enable sustained growth.

Some of the points discussed in the media interview, which are indicators of future economic policy for India in his tenure (Background to the topic has been provided for reference)

Inflation As Short-Term Phenomenon
"I believe that even as the monetary authorities are independent there is a need for coordination between fiscal and monetary policy. "If you believe that inflation is a long-term phenomenon and it is going to sustain then we need to take fiscal policy action. But if you believe that inflation is a short term phenomenon as it is now we depend on monetary policy because monetary policy and fiscal policy have different time lags and different implications as they are going through the economy."
(Background: The RBI has said it aims for wholesale price inflation to fall to about 7 per cent by the end of the fiscal year in March 2009)

Interest Rates
"I have been asked whether monetary policy will be tightened further. There are, as they say, several known unknowns. First, we will have to watch the impact of the measures already taken. Second, we will be watching the drivers of demand – in particular which sectors are triggering the growth in demand. Third, in a globalised world, we will also have to be watching developments around the world and make an assessment of their potential impact on our economic management... All I can say is that we will be monitoring the situation closely and continuously, be mindful of the implications of our monetary stance on the growth prospects, and take action as appropriate."
(Background: The key lending rate, the repo, is at a seven-year high of 9.0 percent and the cash reserve ratio (CRR) is at 9.0 per cent)

Growth
"India's remarkable economic expansion from an average of 5 percent in the '90s to close to 9 percent in the recent period has been led by rise in private consumption, rise in private investment and surge in exports. I believe these engines of growth are still on track. The recent moderation is only a cyclical downturn. The structural India growth story is still intact and credible."

On 2008/09 Growth
"At the moment our estimate still is the number of the RBI. Of course we will be reviewing that as part of the October policy statement."
(Background: The RBI forecasts 2008/09 growth at around 8.0 percent)

On Currency Management
"The RBI's exchange rate policy has served us well, and I believe we will continue on that policy. The elements of that policy have been to not to take a view on the exchange rate but to manage volatility in a flexible and liquid manner."

On Special Market Operations For Oil Companies
"We are not actively considering that because there are no oil bonds in the market at the moment. Oil bonds might come in to the market after the parliament session. If and when the parliament approves supplementaries for under-recoveries of the oil companies, so we will take a view then."

On Capital Account Convertibility
"A lot has been done on capital account convertibility. I understand on some measures we are ahead of the curve and on some measures we are slightly behind the curve. But that's the way we expect in a real-world situation. Capital account convertibility is a continuous process, we continue to manage that process, it remains important on the agenda of the government and of the RBI and we will take appropriate measures."

Financial Reforms
"While what the financial sector has achieved is impressive, the task ahead is formidable. The financial sector has to become more competitive, efficient and forward looking. This underscores the importance of financial sector reforms. I want to conclude on the subject of financial sector reforms with three short comments. First, the liberalisation and development of the financial sector over the last few years has been a key factor in financing our 9 per cent growth. To sustain and accelerate this growth, financial sector reform, aimed at improved efficiency and financial stability, will remain important. In moving forward, we will draw from the lessons of global experience of the recent period, and be cognizant of the evolving global situation. Second, financial sector reforms are not an end in themselves. They have meaning and relevance only if they are anchored in real sector objectives. Third, financial sector reforms should promote inclusive growth through efficient and easily accessible financial services."