RBI's Subbarao: Central Bank Have No `Template Solutions'

NEW YORK (Dow Jones)--India is not decoupled from whatever happens in Europe, said the country's top central banker on Monday. "Whatever happens in Europe will affect us" said Duvvuri Subbarao, governor of the Reserve Bank of India, speaking in New York. "If the crisis deepens, it will influence trade demand and commodity prices." Central banks have to be cautious in balancing between policies that affect growth and inflation he said. India's inflation is high--around 9%--but he estimates it could go down to a more comfortable 4 to 6% range by March 2012. Central banks don't have "template solutions," he said, adding that they have to be careful about communicating policies because they cannot be too transparent. If they provide caveats, markets invariably ignore these conditionalities. The financial crisis of 2008 has changed the thinking of some in the emerging markets. Before it, deploying capital controls was not considered positive but after the crisis, it is considered more viable. That said, a flood of capital would create instability so India prefers long-term investments. "No country gets enough capital at the time it wants," Subbarao said. There is a need for apolitical central banks in democracies because the fear is that monetary policy could become hostage to fiscal compulsion, he said. In India, monetary policy is carrying the burden of fiscal expansion, he added. The improvement of productivity in banking in India is a challenge, he said. The demand for credit is going up at a time when the cost of credit is going up so banks have to reduce their costs. Asked about capital adequacy at banks, he said Indian banks at aggregate levels have reached the norms required by the Basel III rules. The challenge though is that 70% of Indian banks are owned by the government so it is the government that would have to raise the capital.  Comparing the current crisis with the 2008 crisis, he said this time, central banks seem to have exhausted their firepower. The markets also feel there is less coordination this time around.

WSJ