duvvuri subbarao : reserve bank of india ’ s platinum jubilee celebrations – the outreach programme remarks by dr duvvuri subbarao, governor of the reserve bank of india, at the function releasing the rbi commemorative stamp by smt pratibha devisingh patil, hon ’ ble president of india at the rbi office, new delhi, 16 january 2010. * * * 1. on behalf of the reserve bank of india, it is my pleasure and privilege to welcome your excellency, the hon ’ ble president of india for the release of the commemorative stamp marking the reserve bank ’ s platinum jubilee. this occasion, your excellency, is truly special. this is the first time the first citizen of the country has graced the new delhi office of the reserve bank which has the honour and distinction of having been inaugurated by our first prime minister, pandit jawaharlal nehru. 2. a hearty welcome also to the finance minister, shri pranab mukherjee ; minister of state for finance, shri namo narayan meena and minister of state for communication & information technology, shri gurudas kamat. we are delighted that so many of our past governors, deputy governors, top management of the reserve bank and several dignitaries are here today. a big welcome to all of you. 3. seventy - five years is a relatively short span for an institution. even so, the journey since its establishment in 1935 has been eventful for the reserve bank, shaping not only its intellectual evolution but also securing its preeminent position in the economic policy space of the country. during this time, there have been momentous changes – a paradigm shift in economic ideology, ever new perspectives on economic development, growing aspirations of people, path - breaking financial innovations and game changing technological breakthroughs. all these are changes which have influenced the reserve bank, and changes to which the bank has had to respond in its own unique way. the reserve bank is proud to have been part of every major economic event and policy in the country, and its broad mandate underlines its enduring concern for the larger public good. 4. while a lot of things have changed at the reserve bank over the last 75 years – our functions and responsibilities, and the way we deliver our mandate – certain things have remained the same ; in particular, the professionalism and integrity with which the rbi discharges its mandate. the high esteem in which the reserve bank is held today is owing to the

is because it is low today, and thus would mean low policy rates. this is short - sighted reasoning for when commodity prices and global inflation picks up, wpi could well exceed cpi. there is, however, a more subtle argument ; the real interest rate is the difference between the interest rate a borrower pays and inflation – it is the true cost of borrowing in terms of goods like widgets or dosas. if policy interest rates are set to control cpi, they may be too high for manufacturers who see their product prices appreciating only at the wpi rate. i am sympathetic to the argument, but i also think the concern is overblown. even if manufacturers do not have much pricing power because of global competition, their commodity suppliers have even less. so a metal producer benefits from the fall in coal and ore prices, even though they may not get as high a realization on metal sales as in the past. the true measure of inflation for them is the inflation in their profits, which is likely significantly greater than suggested by wpi. a second error that is made is to attribute all components of the interest rate paid by the borrower to monetary policy. for heavily indebted borrowers, however, a large component of the interest rate they pay is the credit risk premium banks charge for the risk they may not get repaid. this credit risk premium is largely independent of where the rbi sets its policy rate. so when someone berates us because heavily indebted industrialists borrow at 14 % interest with wpi at 0. 5 %, they make two important errors in saying the real interest rate is 13. 5 %. first, 7. 5 % is the credit spread, and would not be significantly lower if we cut the policy rate ( at 6. 5 % today ) by another 100 basis points. second, the inflation that matters to the industrialist is not the 0. 5 % at which their output prices are inflating, but the 4 % at which their profits are inflating ( because costs are falling at 5 % annually ). the real risk free interest rate they experience is 2. 5 %, a little higher than elsewhere in the world, but not the most significant factor standing in the way of investment. far more useful in lowering borrowing rates is to improve lending institutions and borrower behavior to bring down the credit risk premium, than to try and push the rbi to lower rates unduly. the policy rate in effect plays a