duvvuri subbarao : will the renminbi eclipse the dollar? welcome remarks by dr duvvuri subbarao, governor of the reserve bank of india, at the talk delivered by dr arvind subramanian, senior fellow at the peterson institute for international economics, washington dc, “ will the renminbi eclipse the dollar? ”, reserve bank of india, mumbai, 7 october 2011. * * * 1. i have great pleasure in welcoming arvind subramanian, senior fellow at the peterson institute for international economics, washington dc. he will shortly be speaking to us on “ will the renminbi eclipse the dollar? ” based, i believe, on his latest book “ eclipse ”. 2. it will be presumptuous on my part to introduce arvind. some of us are privileged to know him personally, and almost everyone here knows him by name and by reputation. stature and reputation 3. over the last few years, all of us have seen arvind grow in stature and international recognition as a leading expert on the global economy. he has been widely acclaimed for his sharp mind, lateral thinking, and prized communication skills. i know for sure, because at the peak of the crisis, he was among the first, possibly the very first, to raise the issue of the need for emes to have a minimum amount of reserves for “ self - insurance ”. it is not surprising that arvind was called upon by the white house to brief president obama before his visit to india last year. eclipse 4. while arvind ’ s achievements to date have been truly impressive, his recent book “ eclipse : living in the shadow of china ’ s economic dominance ” has catapulted him to the top league of thought leaders on the global economy. 5. since its release, barely three weeks ago ( september 16 ), arvind ’ s new book has made intellectual waves. it has been reviewed, critically acclaimed, discussed, debated and analyzed in virtually every major publication of intellectual repute. at a time when there is a new book on china practically every week, for a book to attract this sort of notice and praise is truly remarkable, and a tribute to arvind ’ s solid scholarship, incisive insights, and analytical skills. the very exclusive foreign policy magazine has selected arvind as one of the top 100 global thinkers. of course, i am not surprised. this recognition is

that announcement. in and of itself, this clearly heightens inflation risks. these risks are perhaps aggravated by the fact that, amidst all the global turbulence, crude oil prices have remained quite firm. while the relative stability of oil prices in dollar terms would have provided a strong favourable base effect for domestic inflation beginning in december, this will be offset somewhat by the depreciation of the rupee. however, our projections suggest that the impact will not change the anticipated downward trajectory of inflation. if a sustainable solution to the european sovereign debt problem emerges over the next few weeks, global portfolio rebalancing could reverse the movement in the rupee, which in turn will help moderate the inflation risk. importantly, apart from oil, prices of some other commodities have shown some signs of softening, which is obviously positive for the inflation outlook. bis central bankers ’ speeches on the growth front, the recently published estimates for q2 of 2011 – 12 substantiate the general expectation of a moderation in growth during the current year. some of this is attributable to the cumulative impact of interest rate hikes. in this sense, it is an expected outcome of monetary policy actions, which, as is well - known, work to curb inflation by moderating demand. typically, a growth deceleration precedes an inflation deceleration, so the pattern playing out now is consistent with the expectation that inflation will begin to moderate over the next few months. this has been the basis of our projections and guidance on future policy actions. of course, there have been other factors that have impacted aggregate demand, especially the investment component. however, just as with the exchange rate and inflation, there are growth risks as well. persistent global turbulence is always going to adversely impact the investment climate, which may be further aggravated by domestic conditions. apart from interest rates, investment activity, which is critical to sustaining high growth with low inflation, is also sensitive to a number of other factors. policy actions, both on the fiscal and regulatory fronts, that can favourably impact the investment climate will be critical to mitigating the risks to growth. these run the gamut from tax reform to land acquisition to skill development. a number of initiatives on each of these fronts are visible, but quick resolution and implementation is the key. an important risk factor that we have been consistently highlighting is food. although data from the most recent weeks points to a steady decline in food inflation, the likelihood is that food prices