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Former RBI governor backs Subbarao's rate hike decision

By BS Reporter
July 28, 2011 12:27 IST
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Former Reserve Bank of India (RBI) governor Yaga Venugopal Reddy has termed the central bank's repo rate rise decision an appropriate and balanced action.

"He (RBI governor Duvvuri Subbarao) has explained the position. I think the governor's statement is very balanced, very appropriate as far as I could understand," Reddy said.

He, however, said since he was no longer involved in monetary policy making, it was not possible to have the same insight as the incumbent governor.

"As an academic, with some past understanding I would consider it a very very appropriate action and I can't imagine any other appropriate solution.

And, I think the approach is right under the current situation," Reddy said on the sidelines of an Exim Bank event.

Subbarao became the governor of RBI in September 2008, after Reddy completed his five-year tenure.

Subbarao was given a three-year tenure, which ends this September, and it's still not clear whether

the government will give him an extension.

Reddy said RBI must have taken into account the effect of the past rises while taking the decision to go for a 50 basis points rise this time. "I am sure the governor has taken into account the transmission that had happened," he said.

On fiscal issues, Reddy, however, said the situation needed to be watched carefully. RBI has emphasised on the need for maintaining the government's fiscal deficit target to keep inflation under check.

On whether financial stability should be an explicit mandate of the central bank, Reddy said even if without being explicit, the central bank always assumes the role for maintaining financial stability.

"Without being explicit, it's been already been accepted, it's been interpretedÂ…For the last ten years, I have been saying so. Globally also, it's also accepted in three-four countries. In others, whether it's a mandate or not, the central bank has to de facto assume the responsibility of financial stability," he said.

Image: Yaga Venugopal Reddy

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BS Reporter in Mumbai
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