India's inflation is showing a sign of moderating but it is too early to conclude this is a trend, said RBI's new Governor, Dr D. Subbarao. He has been a little less hawkish than his predecessor on inflation and would wait and see before taking any fresh steps.

Dr. Subbarao claims that the monetary policy of RBI would certainly have an effect on the high level of inflation running in the economy.

The governor says that the latest inflation level has its origin in supply-side and it can be controlled largely by using the measures from the same side. However the demand-side measures also need to harmonize the supply-side measures.

The recent level of inflation has been moderated by supply side measures. Initially the rising prices of food and metal had edged up the inflation rate close to a 16-year-high of 13 percent. This figure moderated to 12.3 percent in data released last week.

"Origins of inflation lie in prices largely of food, metals and crude. Food is an annual if not a biannual phenomenon and responses have already kicked in. Even in metals - steel, for example - although the supply response is lumpy, I think both around the world and in our country, supply response have kicked in. The movement in crude prices has been in response to the supply-demand factors and the US situation and the position of the dollar. So, those responses have also come in," said Mr Subbarao.

The demand-side measures need to step in to curtail inflation further as there were no significant options in influencing prices from the supply side. The regulator will also closely monitor growth drivers and volatile global situation before further tightening the monetary policy.

After three years of over 9 percent growth, the economic growth moderated to 7.9 percent during the April-June quarter of 2008-09. The October Monetary Policy of RBI would review the estimated growth of 8 percent. There is a requirement of co-ordination between the government's fiscal policy and RBI's monetary policy, said the governor.

Control of instability would be the target of the apex institution in its exchange rate policy.

Dr. Subbarao said, "A lot has been done on capital account convertibility. There is the Tarapore Committee Report. I understand on some measures we are ahead of the curve. On some measures, we are slightly behind the curve. But that's the way you would expect in the real world situation because the Tarapore Committee report was written at a point in time and since then there have been developments in the real world."

While stressing the importance of financial sector reforms, Subbarao said that they would have meaning and relevance only if they were anchored in real sector objectives. "Real sector (economic and social sectors) reforms involve building physical and social sector infrastructure. Thus, real sector objectives are ahead of financial sector reforms. Thus, monetary policy plays a subordinate role to fiscal policy," Subbarao pointed out.

D. Subbarao has succeeded Reddy as the RBI governor. Prior to this coveted post, Subbarao was the Finance Secretary in the Ministry of Finance, Government of India. Mr Subbarao has been appointed as the governor of RBI for a three year period. He may, however, be considered for reappointment for another two years, as the RBI Act provides for appointment of a governor for a period of up to five years.

Dr. Subbarao has wide experience on issues in public finance and has held important posts in this area. He was lead Economist in the World Bank during 1999-2004 and worked on issues of public finance in countries of Africa and East Asia. He is a retired IAS officer from the Andhra Pradesh cadre who had topped the civil services batch of 1972.