India’s Subbarao Said to Be Offered Two-Year Extension as RBI’s Governor

By Kartik Goyal - Aug 9, 2011

India’s government extended the term of central bank Governor Duvvuri Subbarao by two years, opting for continuity as the nation grapples with inflation amid risks to economic growth.

Subbarao’s tenure at the Reserve Bank of India will now last until September 2013, according to a statement on the website of the Prime Minister’s Office today. The 61-year-old former finance secretary was appointed as the central bank chief on Sept. 5, 2008 for a period of three years.

Subbarao has raised interest rates 11 times since mid-March 2010 to tame price gains, reversing the monetary easing he presided over in 2008 and 2009 during the global financial crisis. More than $9 trillion has been wiped off stocks worldwide since the beginning of May on concern Europe’s debt crisis and a faltering U.S. recovery will imperil global growth.

“These are difficult times and it’s good to maintain status quo in key policy-making positions,” said Shubhada Rao, chief economist at Mumbai-based Yes Bank Ltd. “The RBI has a tough task ahead, balancing inflation and the threat of another global downturn.”

The Bombay Stock Exchange Sensitive Index, or Sensex, fell 0.7 percent as of 1:40 p.m. in Mumbai. The rupee weakened 0.5 percent to 45.18, declining for a sixth day, the longest losing streak since March 2009. Yields on the 10-year bonds dropped five basis points, or 0.05 percentage point, to 8.21 percent.
Singh’s Adviser

Subbarao, who was an economic adviser to Prime Minister Manmohan Singh before he became the top bureaucrat in the finance ministry, is a physics graduate from the Indian Institute of Technology. He joined the civil service and was later sent to the World Bank, where he was the lead economist between 1999 and 2004 on public finance in Africa and East Asia.

Subbarao has a masters in Economics from Ohio State University and was a Humphrey Fellow at the Massachusetts Institute of Technology. He holds a doctorate from India’s Andhra University.

India’s Finance Minister Pranab Mukherjee said today that the extension of Subbarao’s tenure will provide “stability.”

In the past 1 1/2 years, Subbarao directed monetary policy at taming inflation, which accelerated to 9.44 percent in June.

At the central bank’s July 26 policy meeting, he increased the repurchase rate by 50 basis points to 8 percent and raised the inflation forecast by 1 percentage point to 7 percent.
Global Risk

Since then, the risk of another global downturn has intensified.

Standard & Poor’s downgraded the U.S.’s AAA rating for the first time on Aug. 5. Group of Seven nations yesterday vowed to take “all necessary measures to support financial stability and growth,” and said that its members will inject liquidity and act against disorderly currency moves as needed.

European Central Bank President Jean-Claude Trichet signaled he’s ready to start buying Italian and Spanish bonds in his riskiest attempt yet to tame the sovereign debt crisis in the region.

India’s central bank yesterday pledged to respond “quickly and appropriately” to provide “adequate rupee and forex liquidity” to curb “excess volatility” in interest and exchange rates.

The Reserve Bank also said that while “downside risks” to India’s expansion may have increased amid weakness in the global economy, “they are likely to have limited impact.”

Mukherjee yesterday said a global slowdown may help drive down international commodity prices, especially fuel, easing inflationary pressures.

The Reserve Bank last month maintained its growth forecast of 8 percent for the current fiscal year ending March 31. The economy expanded 8.5 percent the previous year.

To contact the reporter on this story: Kartik Goyal in New Delhi at kgoyal@bloomberg.net

To contact the editor responsible for this story: Stephanie Phang at sphang@bloomberg.net
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