10.8.11

RBI guv Subbarao gets two-year extension

The Prime Minister’s Office on Tuesday announced a two-year extentsion for Reserve Bank of India governor D Subbarao at a time when the government and the central bank are trying to limit the impact of the US rating downgrade and the slowdown in debtridden European economies. Though it is usually the finance ministry which deals with RBI appointments, breaking from tradition, the PMO put out a statement in an apparent effort to provide comfort to the market as there was speculation who the next governor would be, considering that Subbarao’s term is ending on September 5. Subbarao, who belonged to Andhra Pradesh cadre IAS officer, went to RBI at the height of the global financial crisis. As part of the damage-control exercise three years ago, the former finance secretary worked closely with the government as well as the Securities & Exchange Board of India (Sebi) to take steps in a bid to limit the damage to the Indian economy. “I am happy that the government has reposed its confidence in me at this difficult juncture in the world economy. I look forward to working with a great team in the Reserve Bank to meet the many challenges ahead,” the governor said. Known to be frank in his opinion, Subbarao did not even spare the government in protesting against the finance ministry’s move to set up a panel headed by the finance minister to adjudicate in disputes between regulators on hybrid products such as unitlinked insurance plans, which, in its earlier avatar, was a mix between a mutual fund scheme and a life insurance or pension plan. It was only after the RBI governor was appointed the vice-chairman of the panel with the other financial sector regulators as members, the central bank dropped its opposition to this move. Subsequently, RBI vociferously argued against the Financial Stability & Development Council (FSDC) on the grounds that the new panel was not required given the present system of inter-regulatory co-ordination. Besides, it said the panel, headed by the finance ministry, would infringe on RBI’s role of dealing with financial stability issues. It is not just protests against turf intrusion that has been a Subbarao trademark, he has also stood his ground on interest rate increases, going to the extent of abandoning his “baby steps” approach to interest rate increase which saw the central bank raise key policy rates by 25 basis points. Instead, when he realized that RBI’s steps were not having the desired effect on moderating inflation, which remained around double-digit rates, he opted for 50 basis point hikes. In recent years, privately, the government has opposed any steep increase in interest rates fearing that it would hurt economic growth. Subbarao has tried to provide more stability on the interest rate front by trying to avoid mid-policy changes. In fact, he has gone and changed the review calendar so that every 45 days the RBI issues a statement, and announces changes, if required.

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