2009-10 CHALLENGING YEAR- R B GOVERNOR

2009-10 will be more challenging : RBI Governor
RBI to manage Government Borrowing : D Subbarao


[New Delhi, 27 March 2009] The year 2009-10 will be more challenging as compared to the previous fiscal year, said Dr D Subbarao, Governor, Reserve Bank of India. While speaking at the CII's National Conference and Annual Session 2009, the governor said that painful adjustment is inevitable and the RBI's challenge would be to minimize the pain. He also assured that the government's large borrowing programme will be managed by the RBI so that interest rates are least impacted.

Giving a comprehensive yet complete picture of the crisis, Dr Subbarao pointed out that compared to the 1997 Asian Crisis India is now more integrated with the world economy, not just through trade linkages but also via equally deep financial linkages. A third transmission channel, in addition to the real and financial channels, is through confidence. Drying up of overseas financing, slackening demand and confidence loss in the economy are the factors that have led to growth moderating at a pace that is steeper than earlier thought, said the Governor.

While highlighting the Reserve Bank's response to the crisis, Dr Subbarao said that RBI has adopted a well directed approach of maintaining ample rupee and foreign exchange liquidity and credit flow to productive sectors through both conventional and unconventional measures. As a consequence of the measures, potential liquidity of Rs 390,000 crore has been injected into the system and call rates have been brought within the LAF corridor. However, the governor remained concerned that although banks' credit has expanded, the total flow of resources to the commercial sector has declined.

On evaluation of the government's response, Dr Subbarao pointed out that while in advanced economies, the crisis translated from the financial to the real sector, in emerging economies it was vice versa. Therefore even though the origin of the crisis across the world is common, the response is country specific. In India, healthy inflation outlook, lower crude prices, modest current account deficit, well functioning financial markets, minimal wealth loss and social safety net system will provide a cushion in these times of distress. He assured that when the recovery comes in India, it will be faster and swifter than in advanced economies.

Mr R Seshasayee, Past president, CII and Managing Director, Ashok Leyland Limited, while moderating the session, said that the current crisis presents a huge opportunity for Indian business leadership. The current challenge facing India is to reassess its growth model to ensure certain and sustainable growth. Amidst the possibility of an emerging bipolar world economy with China and U.S. at its centre stage, India should also seek a place without which it may face regional imbalance and geopolitical risks.

While delivering the concluding remarks, Mr K V Kamath, President, Confederation of Indian Industry, struck a positive note saying that if India could focus on its positives, it would be among the first ones to recover from the crisis.