India's central bank chief: a hawk flying solo against inflation

Sun Nov 11, 2012 4:11pm EST
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By Tony Munroe and Suvashree Dey Choudhury

MUMBAI (Reuters) - Indian central bank Governor Duvvuri Subbarao's standoff with a finance ministry that wants interest rates reduced sooner rather than later may prove the defining moment of his tenure.

But while he wins plaudits for asserting the Reserve Bank of India's autonomy, Subbarao's policy draws mixed reviews.

Indian interest rates are among the highest of all the major world economies at a time when the country is set to register its worst growth rate in a decade, yet inflation has remained uncomfortably high for nearly three years.

With his term expiring next September, Subbarao has less than a year to vindicate his stance as a hawkish global outlier.

Interest rates should come down, the question is when. The RBI has repeatedly said that depends how long the government takes to rein in a fiscal deficit, financed by heavy borrowing, that has credit rating agencies thinking about relegating India to junk bond status.

Late last month, the day before the RBI's quarterly monetary policy release, Finance Minister P. Chidambaram held a hastily called news conference to outline a roadmap for reducing India's fiscal deficit, in an unsubtle bid to persuade Subbarao to cut interest rates for the first time since April.

Three days earlier, Subbarao told Chidambaram during their pre-RBI policy meeting of his intention to keep rates on hold. He stuck to his guns, opting instead to ease policy through lower cash reserve requirements so banks had more money to lend.

By defying the very public pressure to cut rates, Subbarao has dismissed speculation that he might bend to the newly appointed minister's will, even though Chidambaram had handed him the RBI governorship during a previous stint as finance minister.   Continued...

Duvvuri Subbarao, governor of the Reserve Bank of India, speaks during "The Citi Series on Asian Business Leaders" at the Asia Society in New York, August 29, 2012. REUTERS/Andrew Burton