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Change at the RBI & more...

Sep 2, 2008

Subbarao to replace Dr. Reddy
Contrary to popular expectations, the Prime Minister has appointed Finance Secretary D. Subbarao as the next governor of the central bank, replacing Dr. Y. V Reddy. At a time when the economy is fighting the highest inflation since 1992, it was expected that the government may extend Dr. Reddy's term because of his decade-long experience at the RBI. Mr. Subbarao will serve for three years, replacing Dr. Reddy whose term ends on September 5. Meanwhile, in a recent interview to Bloomberg Mr. Subbarao was quoted saying, "I can't say firmly that inflation has peaked because it will depend on a number of factors including global factors which are beyond our control". He also cited further rises in interest rates as the 'obvious solution'. Thus Mr. Subbarao may have to follow Dr. Reddy's four-year-old policy of raising borrowing costs as inflation has shown few signs of easing. India's central bank, which prepares monetary policy in consultation with the Finance Ministry will pull out all stops to check prices ahead of elections due by May 2009. During his tenure Dr. Reddy has done a brilliant job of keeping growth and monetary stability well balanced and at the same time safeguarded the Indian banking sector from the global financial crisis. Dr. Reddy has altogether increased the repo rate by 3% since October 2004 to prevent the second-fastest growing economy after China from overheating. He also raised the proportion of CRR that banks need to set aside by 4% since December 2006 to check money supply from stoking inflation. His diligence in efficient governance of the banking and financial sector has been acknowledged the world over. All in all, Mr. Subbarao has very large shoes to fill in.

  • Also read - Monetary Policy: RBI doesn't give up

    Fending off the 'Olympics curse'
    The Olympics have come and gone and while China put up a spectacular show both in the organisation of the event and the competition itself, the limelight has now shifted to the state of the Chinese economy. An interesting fact reported by Morgan Stanley is that 10 of the 11 Summer Olympics host nations (dating back from 1956) analyzed by the firm saw growth and investment slump in the year following the games; the only exception being the US in 1996. Will China be successful in breaking this 'curse'? Infact, key data released with respect to the Chinese economy has not been very enthusing. China's growth slowed down to 10.1% during the second quarter as against 12.6% in the corresponding period last year.

    The Chinese authorities seem determined to reverse this trend. The government has started easing lending restrictions and is contemplating doling out a fiscal stimulus package of US$ 58 bn. Tax cuts are also on the agenda. Bloomberg states, "China has tripled railway spending this year to 300 bn yuan. The current five-year plan, which runs through 2010, calls for investing almost 4.8 trillion yuan on power stations, waterways, roads and other infrastructure projects; more than the combined output of Taiwan, Thailand and Vietnam. Reconstruction after May's Sichuan earthquake could cost another 1 trillion yuan".

    The Asian economies are already feeling the effects of the slowdown in the US and Europe. A Chinese slowdown will only worsen matters further. Hence, China's spending on infrastructure is critical for the Asian nations to enable them to brave the rough weather.

    The link between Olympics and pharma
    What has the Chinese Olympics got to do with Indian pharma companies? The link between the two is raw materials. India at present imports huge quantities of intermediates from China, which the former uses for the manufacture of APIs, which in turn are used in making finished dosages. In a bid to keep pollution under check before and during Olympics, China had shut down many factories which were major pollutants. A host of intermediates manufacturers were among those who were asked to shut down production.

    As a result, other producers hiked prices and this has impacted Indian pharma companies in the form of higher raw material costs. Higher intermediate prices pushing up raw material costs had hampered domestic companies last year as well. However, the sharp appreciation of the rupee against the dollar helped them cushion that blow. This year the scenario is different as the rupee has been depreciating and the high cost of imports do not seem to be abating. While this problem is expected to pressurise pharma companies for the rest of the year, things should start looking up from the start of next year once the production in China scales up.

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