May 06, 2013, 10.41 AM | Source: CNBC-TV18

Taking away capital mgmt from RBI not advisable: Subbarao

In an interview with CNBC-TV18's Latha Venkatesh, Duvvuri Subbarao stressed that taking away capital management from Reserve Bank of India is not advisable and that the central bank had made this suggestion to FSRLC when it was consulted

D Subbarao

Former Governor, RBI

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Moneycontrol Bureau

Reserve Bank of India Governor Duvvuri Subbarao, who is known to have mind of his own, and has many times been at odds with the Finance Minister today voiced his discontent about the Financial Sector Legislative Reform Commission(FSLRC’s) recommendations regarding capital inflows.

In an interview with CNBC-TV18’s Latha Venkatesh, he stressed that taking away capital management from Reserve Bank of India is not advisable and that the central bank had made this suggestion to FSRLC when it was consulted.

“So we submitted but they have decided, the way they have decided. Now I believe the government will call for consultation and we will certainly not only put across our point but argue our point,” he said.

FSLRC which was set up to rewrite and update all the archaic Indian financial sector laws has recommended that the government and not the RBI should make rules with respect to capital inflows. This recommendation is irrespective of whether the inflows are FDI, FII, forex loans or NRI deposits.

This recommendation has been strongly criticized by many economic and baking sector scholars including KJ Udeshi and YH Malegam. Subbarao said that FSLRC’s argument on this is that external sector management with capital inflows has bearing on monetary policy, on financial stability and on bank regulation and hence RBI should not be handling capital inflows. 

Also read: Barring FDI, RBI must control all capital flows: YH Malegam

On Friday, RBI cut the repo rate by 25 basis points and pointed that further room for monetary easing was very little. Upside risk to inflation and high current account deficit (CAD) were sighted as two key reasons by RBI for its hawkish stance.

Today, Subbarao said that CAD could come close to 5 percent in 2012-13 and stressed that any improvement below 5 percent would be a good improvement on CAD. He said although India was able to finance 6.7 percent CAD up till January due to higher liquidity in global system, we can not depend on mere foreign capital flows. “We must have low and steady CAD financed by stable flows,” he added.

Diesel price hike was seen as one of the key step in controlling the twin deficit-CAD and fiscal deficit, however oil retailers have declared on three prices hike since the fuel was deregulated. Subbarao also learned that diesel price hike was deferred on the back of fall in global crude oil prices, which gave oil retailers leeway to postpone the price hike. He however said that it would have been better if scheduled rise in April was taken by oil retailers.

On the recent cobrapost expose which involved leading private sector banks like ICICI Bank, Axis Bank, and HDFC Babk, Subbarao said that RBI was determined to take strict action against erring banks and will soon introduce systematic improvement in know your customer norms.

On the new banking licenses Subbarao said that RBI would constitute committee that will vet all applications only after June. He said that RBI would issue enough licenses to instill competition but would also make sure that they don’t outnumber the existing players.

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