The Reserve Bank of India (RBI) Governor Duvvuri Subbarao is not keen on a third term as the chief of the country's central bank. His term ends in September 2013.
Subbarao took over as the RBI Governor at the height of the global financial turmoil in September 2008. He was initially given a three-year term, which was extended last year by two more years.
In an interview with The Wall Street Journal (WSJ) Subbarao talked about his efforts to restart India's growth engine and to fight persistent inflation.
Subbarao is believed to have touched upon a range of issues, including the RBI's efforts to stabilise the plunging rupee in late 2011, his calls for cuts to government spending, and how it was difficult to increase interest rates amid objection from a technical panel.
On the RBI's CRR cut in January, he said it was both a signal that the interest rate cycle has peaked and also to infuse liquidity. In the policy statements in October and in January, the RBI had indicated that the monetary tightening has peaked, and from here onwards the central bank might start easing.
On the RBI's pointed reference to the ballooning fiscal deficit in the January policy Subbarao said that it was a more opportune time to do so because the budget shortfall has breached the initial estimate.
The battle against inflation will become that more difficult if the Government does not make credible and sizeable fiscal adjustment, he said. Secondly, private credit will get crowded out, the RBI chief said, adding that the twin deficits of current account and fiscal tend to feed on each other.
"The only discretionary expenditure they (the Government) can make in the short term is on subsidies. And there is, I believe quite a strong case for making adjustments on subsidies even from the anti-poverty perspective," Subbarao said.
He said that the Finance Minister should indicate a medium term roadmap for fiscal deficit during the upcoming Budget, and that there was a big probability he will do that.
The Government should explore the possibility of curtailing expenditure while also looking to raise tax collection to build the fiscal adjustment. There must also be some focus on the quality of fiscal adjustment, Subbarao said.
On the global oil prices, he said that India needs to reduce its dependence on oil imports and one way to do that was to deregulate petroleum product prices.
The central bank Governor also said that India's economic growth in FY13 is likely to be higher than in FY12 as the RBI might resort to interest rate cut at some point in time. "We expect growth to be higher in FY13 than in FY12, partly because at some point in time we might start easing the interest rate cycle," he told WSJ.
"Partly because the external situation will be more stable. The world recovery will pick up. And I'm hoping that a confluence of factors, including the sentiment factor that is inhibiting investment will have run out, and that positive sentiment will revive. Animal spirits will come back into play," the RBI chief said.
While the RBI will come out with its formal projection for India's GDP growth for FY13 in April, the Prime Minister's Economic Advisory Panel has pegged it at 7.5-8.5%. As per the advance estimates of the CSO, the GDP growth in the current fiscal year is likely to slip to 6.9% from 8.4% a year ago.
On inflation, Subbarao said that the decline seen in November and December was largely due to food prices. "But we've also seen demand pressures easing. We've seen a decline in non-food manufactured product inflation, which is our measure of core inflation, which I believe peaked some months ago," he said.
On the rising non-performing loans (NPL), Subbarao said that the incidence of impaired assets out of restructuring would certainly be higher than the overall sample.
"But we've done stress tests, and they show that our banks will remain profitable and will have no capital concerns even under fairly significant stress in terms of the some of the restructured assets turning into non performing assets," he said.
Public finance reform at both the central and state governments would go a long way in providing a platform for all the other reforms to take off, the RBI chief said when asked about structural impediments to higher GDP growth in India.
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