Global imbalances not to hit India

HYDERABAD: Reserve Bank of India governor YV Reddy on Saturday proposed a cautious approach for opening up the capital account and allowing global competition. “Considering that we have been under a controlled regime for so long, some sectors need more time to catch up with this pace of development,” the RBI governor said, delivering the diamond jubilee lecture at Osmania University.

Dr Reddy said India would not be affected by global imbalances as it maintained a proper savings to investments ratio. “In countries like the US and China, a wide gap exists between savings and investments and it could lead to future economic shake-ups. But, this will not affect our growth prospects,” he said.

In order to ensure stable growth, he said, India should focus on competitiveness. “We can no longer control external sectors like we did during 1950s to 1980s. We should produce quality products and should be in a position to compete internationally,” he said.

Talking about current account deficit, he said, it should be adjusted against remittances. “Though economists are arguing that current account deficit should not be over 2% of the GDP, if one adjusts it with remittances it can go up to 4% of the GDP,” he added.

Later, speaking about rural banking at the Centre for Economic and Social Studies, he lamented at the fact that micro finance institutions were mostly operational in states with well-developed banking systems.


The RBI governor said the failure of the organised credit system in extending credit has led to excessive dependence on informal sources usually at exorbitant interest rates. “This is at the root of farmer distress reflected in excessive indebtedness,” he said.

Quoting from the 11th Plan document, he said, interest rates in micro finance sector had to be significantly higher than the banking sector as their operating cost was higher. “It is important to remember that most MFIs charge rates, which are much lower than what is charged by moneylenders,” he pointed out.

In an interesting engagement, the RBI governor was also the chief guest at the launch of The Long Reverie of Partha Sarma authored by C Sriram, son of Irda chairman CS Rao.