Islamic banking inconsistent with the regulatory set up in India, says RBI governor D Subbarao

MUMBAI: The Reserve Bank of India governor D Subbarao on Wednesday said implementing Islamic banking model in India would be impossible because it is inconsistent with the banking regulatory set up where interest is charged and given.

However, he said he has suggested the government that the decision being political, it must debate and, if required, bring in a law.

“It can be a parallel system for which a separate regulatory set up can be created,” the governor said. “It is a political issue," he said.

During his two day visit to Kashmir where the central bank will hold its board meeting, RBI governor alo questioned the wisdom of the (kolkatta) state government to levy sin tax to fund the losses that this section of individual savers (from saradha) who are excluded from the formal financial system faced. “If tax payers have to fund for the losses created by a failed management, it is a political decision,” said Subbarao.

He also defended the central banks decision to repeatedly hike key policy rates to check the runaway rise in prices.

“It is a fact that in last three years, we have raised the interest rates 13 times and there has been a lot of criticism that it stifled growth,” Subbarao told a select gathering of students at the J&K Bank’s corporate headquarters.

“It is also a fact that tightening (of the market) brought down inflation from two digits to a single one and yes it did impact the growth rate.” Inflation, he said, cannot be fought without “making some sacrifices” like compromising growth rate which are inevitable.

The wholesale price index fell to 5.96% in March 2013 from 7.69% in March last year and the Index of Industrial Production is at 0.6%, down from 4.3% in February 2012.

In its monetary policy statement for 2013-14 the RBI has projected headline inflation at 5.5% and growth in gross domestic product is expected to be around 5.7%.