Mint Road gears up for Subbarao's balancing act

While tackling inflation is going to be the top priority for Duvvuri Subbarao, who is set to take over as the new Reserve Bank of India governor, bankers expect a fresh perspective on allowing new financial instruments and managing foreign exchange.

Over the next seven weeks, the 59-year-old IIT alumnus who holds a doctorate in economics, has his task cut out. He has to not just learn how the central bank operates, but also present the half-yearly monetary policy review.

“Managing inflation without hampering growth is a big challenge. This is important for the banking industry since with growth banks will be able to maintain the spreads and improve profitability,” said Indian Banks’ Association Chief Executive Officer K Ramakrishna.

 

“A regulator’s job is always tough. The challenge is to manage the current growth momentum and the overall economic scenario,” Chanda Kochhar, joint managing director at ICICI Bank, told a television channel.

The other key statement that the bankers are expecting from the new governor will be on opening up the sector to further competition in the backdrop of the growing opinion that RBI is unlikely to allow greater play to foreign players in terms of acquiring “strong” Indian banks.

The bureaucracy at RBI under the present governor Y V Reddy’s term had opposed any intervention from the finance ministry on the issue. It is of the opinion that the present global financial turmoil made the task even tougher.

In addition, the government still has a large fiscal deficit and a current account deficit, which are rising. Besides, the third pre-condition for opening up — consolidation in the local market — has also not materialised.

“We are not expecting too much opening up either. In any case, the present rules give us substantial growth opportunity,” said the country head of a prominent foreign bank.

“In the backdrop of the global credit crisis, the focus should be on banks reaching a size and risk management so that they are able to withstand any adverse environmental change,” added an ING Vysya Bank executive.

While banks expect that Subbarao will suggest a review of the situation without resorting to widespread opening up, his evaluation of the situation from the other side with respect to allowing newer financial instruments into the market will speed up the launch of interest rate futures and credit derivatives.

The central bank still has concerns about the two instruments and raised the issue at a meeting of the high-level committee on capital markets last month. “At the next meeting that point of view may be different,” said a source.