The Telegraph
Since 1st March, 1999
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New RBI boss votes for soft interest rates

Mumbai, Sept. 6: Yaga Venugopal Reddy today took charge as governor of the Reserve Bank of India (RBI) with a promise that he will continue with the soft interest rate regime.

The new governor, whose term would last for five years, also proposes to temper this continuation in monetary policy with some changes. “The RBI believes in continuity. It will be continuity and change, mixed appropriately,” he told newspersons here after assuming charge.

Reddy, who takes over as the 21st governor of the central bank, comes at a time when the economy is looking up after a good monsoon and the benchmark interest rate is at a three-decade low. A comfortable balance of payment position apart, the country’s foreign exchange reserves are at an all-time high.

Moreover, with better-than-expected first-quarter performance by companies and a bullish capital market, the sentiment is upbeat. Expected are high that the Indian economy will grow more than 6.5 per cent this fiscal.

However, analysts feel the high fiscal deficit of Centre and the states will be a major challenge for the new governor.

Reddy succeeds Bimal Jalan who brought stability to the rupee in addition to a comfortable forex position and a soft interest rate regime, which is being followed over the past three years.

“The RBI believes in continuity and even reforms are a continuous process,” Reddy, who was the executive director of international monetary fund (IMF), said on being asked if the soft monetary policy stance would continue.

Reddy is the first RBI governor to get a five-year term right from the beginning. Jalan, who has been nominated to the Rajya Sabha, retires after serving for six years as the governor.

Prior to his appointment as executive director of IMF in 2002, Reddy was the deputy governor of RBI, a post he held since 1996. An IAS officer, he also held positions of secretary (banking) in the ministry of finance, additional secretary in the ministry of commerce and joint secretary in the finance ministry.

Debt market circles said Reddy’s comments on the soft interest regime is reassuring, particularly with the monetary and credit policy due next month. Few here expect the Bank Rate to be brought down by 25 basis points.

Reddy, called ‘Venu’ by his close friends, is also known to communicate with the markets in a skillful manner. In 1997, when the rupee was stable against the dollar for a long period, he told a foreign exchange dealers meeting that the domestic currency was overvalued in trade-weighted terms.

The rupee fell nearly 1 per cent within a week of his remarks. Later in 2001, when bond prices were rising on hopes of a reduction in interest rates, Reddy said in an interview that lower rates were not the solution to the then prevailing economic problems. His remarks led to yields firming up.

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