After numerous rounds of speculation and media bytes (some covered here), Dr Subba Rao makes his agenda clear. In his first press statement after becoming RBI Governor, he focuses on two things- inflation and financial sector reforms.
His stance on inflation:
The current high level of domestic inflation reflects a combination of supply-side pressures as well as demand-side factors. It is not surprising that after five years of 9 per cent growth, supply constraints will begin to emerge.
However, the present inflation is largely a global phenomenon and is being driven by key international commodity prices, especially of crude oil, metals and food. These external pressures are being exacerbated by strong domestic demand pressures.
Though demand is not the main problem, in the absence of further flexibility on the supply side, demand management has to be part of the solution. Dampening demand and anchoring inflation expectations has been the logic behind Reserve Bank’s monetary stance.
So, demand side measures are still going to be the key to managing inflation. If supply cant be increaed demand has to be moderated a bit. What to expect in Monetary Policy?
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.
What on financial sector?
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.
In all likelihood I expect developments in financial sector to be much like the past- gradual and slow and steady. With pretty bad global experiences and hardly any reforms in real sector, expecting reforms only in financial sector is too much to ask for. This is also what Dr Reddy has said in his outgoing interaction with the press.