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More baby steps are better than big leaps: Duvvuri Subbarao

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D Subbarao RBI governor

D Subbarao RBI governor

Few central bank governors have had as tough an initiation into office like Duvvuri  Subbarao.  Mr Subbarao, who took charge at Mint Street when the global financial crisis started unfolding in the middle of 2008, has since switched gears from coping with the economic slowdown to combating inflation and ensuring that growth impulses are sustained. The RBI Governor spoke to Shaji Vikraman and Mayur Shetty on the monetary policy and other issues. Excerpts:

With demand pressures building up, there is a feeling that the RBI has been behind the curve in reacting?

I have heard this assertion that RBI is behind the curve and in the quick comments that came after our policy, people have said that we are still behind the curve. When people talk about ahead or behind the curve, they have a view of where we need to get. And indeed we do.

We have said in our policy that we need to normalise our rates. But it’s a question of calibrating our path from here to there. In doing so, we have to keep in view inflation dynamics, growth dynamics and liquidity management. Much of our growth is coming today from sectors that are interest-rate sensitive.

As much as growth is consolidating we have to make sure that growth impulses are supported. On inflation, we have to balance abating supply side pressures with emerging demand side pressures. Looking at all that, we felt that more baby steps are better than a few large quantum jumps.

In the macro development statement, you had stated that it was important to build up adequate forex reserves to deal with external shocks. Could you elaborate?

Those emerging market economies which had substantial forex reserves could withstand the impact of the financial crisis more than those which did not have reserves. It’s also buttressed by our own experiences between 1991, when we were down to the bottom of the barrel, and 2008-09 when we could manage the reserves because we had over $300 billion.

But again, I want to say that we do not follow a policy of building up reserves as a measure of self insurance. Our reserves have been built up as a result of our macroeconomic management.

We want capital flows to come in, we want to make sure that they are roughly correspondent with our absorptive capacity and that excess flow should be minimised and should there be excess flows we must take action to ensure that their impact on inflation is not there.

Given the fiscal policy compulsions now, doesn’t it come in the way of smooth conduct or management of monetary policy?

Around the world, fiscal domination of monetary policy had abated in the years before the crisis. But because of the extraordinary nature of the crisis, central bank actions alone were not sufficient to manage the crisis and the government had to supplement through fiscal support. That happened in our system too.

I believe that the fiscal stimulus measures that the government initiated were necessary and had the desired impact. Now, as the crisis is waning, it’s important to roll back both fiscal and monetary measures and that’s what the government has done and what we have done from the monetary side.

Going forward, it’s necessary that we harmonise our measures because the objectives are the same.

The policy statement points out that property prices in Mumbai have crossed the pre-crisis levels. Do you see a need for tightening prudential norms?

In October we raised the provisioning norms for commercial real estate to 1% from 0.4%. We also had discussions with financial market participants including commercial real estate associations and we looked at the numbers to see if there is any need to revisit those norms.

It turned out that the measures we had initiated in October had some impact on restraining lending to commercial real estate sector. I have been advised that there is no immediate need for further action on this regard. We are keeping a vigil on prices of commercial real estate and housing and will take action if necessary.

The PM recently said that one of the lessons of the financial crisis was not to stop innovation. One criticism directed at RBI is that it has lagged in financial sector reforms.

Slow is a relative term, so it depends on who is saying it. It’s possible to say from one perspective that RBI is more thoughtful and more circumspect than other stake holders.

Having worked outside the RBI, I can say that if RBI is more circumspect it is because it has more information and the ability to evaluate the information which is not available to people outside.

I think the prime minister is right. We should be open to financial innovation, we must continue with financial sector reforms and all of us should have an open mind on that.

There has been a lot of lobbying from corporate houses seeking bank licences. RBI has so far resisted it, what are your thoughts?

Yes we are considering licensing some more banks. However, I think it would be inappropriate for me to make any statement on what our view will be because we will be putting out a discussion paper that will marshal international experience, our domestic experience and we will invite views on that.

I am sure that paper will have reference to corporates entering into the banking sector. We also discussed this in the meetings with the banks today. They said that there must be a level playing field and that I feel it’s a fair request.

Are you asking core investment companies to register over concerns that they are over leveraged ?

Core investment companies, whose business is to invest in other companies, have been exempt from RBI regulation so far. Now they have requested us that they should get RBI regulation.

The decision today is in that direction – that systematically important investment companies should conform to certain financial parameters. I cannot say at this point of time (whether there will be limits on leverage) but there will be regulatory requirements on them.

You have asked banks to report their dealing in OTC derivatives. Is that a precursor to easing of rules to allow zero cost derivatives?

No. This is just to bring in more standard global practices. I don’t think you should read anything about further reform measures out of this.

The policy statement points out that property prices in Mumbai have crossed pre crisis level. Do you see a need for tightening prudential norms?

In October we raised the provisioning norms for commercial real estate to 1% from 0.4%. We also had discussions with financial market participants including commercial real estate associations and we looked at the numbers to see if there is any need to revisit those norms.

It turned out that the measures we had initiated in October had some impact on restraining lending to commercial real estate sector.

I have been advised that there is no immediate need for further action on this regard. We are keeping a vigil on prices of commercial real estate and housing and we will take action if necessary.

After the recent conflict between Sebi and Irda over the regulatory jurisdiction of Ulips, questions are now being raised as to the role of the High Level Committee on Financial and Capital Markets (HLCC) which you head in settling inter-regulatory issues.

This difference of opinion between the insurance regulator and the securities market regulator has been discussed in the HLCC for several months. Both regulators said they would discuss and settle this. In the event, it turned out that it’s a legal issue.

If it is a legal issue, neither the HLCC nor the proposed Financial Stability and Development Council (FSDC ) could settle this.

The other question is whether the FSDC could prevent this, which the HLCC could not. This is a matter of contrafact, but I don’t believe that it is a question of bureaucratic systems. It is a question of ability to resolve legal issues outside of the legal system.

You appeared to be in favour of foreign banks coming in as wholly owned subsidiaries I just want to correct it. The global standard is getting towards wholly owned subsidiaries.

But let me also say that I also attended the BIS conferences on governance and it is not as if the wholly owned subsidiaries are ‘holy cows’ and branches are not. There are costs and benefits to both models.

(Sourced from Economic Times)

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Posted by on Apr 21 2010. Filed under CSR Interviews. You can follow any responses to this entry through the RSS 2.0. Both comments and pings are currently closed.

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