Reddy all set to succeed RBI Governor Bimal Jalan

Y Venugopal Reddy, an executive director at the International Monetary Fund, who is likely to be appointed as governor of the RBI will face the challenge of keeping interest rates low enough to power economic growth while fiscal deficits stay stubbornly high at nearly 11 per cent of GDP.

“Reddy’s appointment has been finalised at the highest level. An official announcement is expected soon,” a source said to Reuters. Reddy is set to succeed the current RBI Governor Bimal Jalan, who is is likely to leave next month for a Rajya Sabha seat. If the appointment comes through, he will have pipped two other candidates — Vijay Kelkar, advisor to FM Jaswant Singh, and S. Narayan, a senior bureaucrat at the Prime Minister’s office. Reddy, 60, was RBI deputy governor in charge of monetary policy before he went to the IMF. Along with Jalan, he had steered India safely through the asian financial crisis. A career bureaucrat (he belonged to the IAS cadre), Reddy will face the difficult task of keeping interest rates low enough to power economic growth while tackling a high fiscal deficit.

He had earlier expressed reservations about lowering interest rates when fiscal deficit was very high. The combined fiscal deficit of the Union and state governments is nearly 11 per cent of GDP, which has prompted international rating agencies to assign junk status to India’s debt. The key bank rate is at a low of 6 per cent, down from 8 per cent three years ago.“You have long-term rates at historic lows of around 5.7 per cent and a high fiscal deficit. The situation is quite unrealistic and will need a tough balancing act,” said Saumitra Chaudhuri, ICRA’s economic advisor.

The high fiscal deficit, which could put upward pressure on rates and crowd out private borrowing, remains the biggest risk to lower interest rates, analysts said. The new head is likely to adopt a cautious approach towards a free float for the rupee, continue to maintain a strict vigil on the currency market and build on forex reserves, which are at a record high, analysts said.