Subbarao has no masters
The first and foremost reason is that Subbarao seems to be his own master. If he has decided to fight inflation over growth, he will stay the course. Late last, year when the RBI left interest rates alone, Finance Minister Chidambaram said: "Growth is as much a challenge as inflation. If the government has to walk alone to face the challenge of growth then we will walk alone."
While the FM, industry and those in government were clearly upset, it did not bother Subbarao. He went on to show that he would fight inflation, and not cut rates, despite pressure from government and industry.
Inflation at 43-month low
Food inflation remains high, which is a fact, as the CPI inflation still remains elevated. But, the WPI inflation has fallen and in May it fell to a 43 month low of 4.7 per cent. The RBI's stance on keeping interest rates elevated has borne fruits and inflation is clearly headed lower. Of course, the RBI may have fought inflation at the cost of growth, but, many argue that low growth rates in India have many other factors apart from elevated interest rates.
Doing well to battle the rupee
The RBI may have squeezed liquidity from the banking system in recent measures, but, it is showing results and the rupee is back to the 58 levels from its record close of 61.21. Subbarao with his vast experience has been fighting the rupee through measures to reduce gold imports and curtailing liquidity in the system.
With elections around the corner, a new person at the helm may be risky
It would be better to continue with an experienced hand at RBI, especially since general elections are now a few months away. The last few months of government would see few major decisions being taken and a lot would depend on the RBI to control inflation, push growth higher, battle inflation and the falling rupee.
It's clear that an experienced hand at RBI is need of the hour as India is passing through tumultuous times on the economic front. Perhaps, Governor Subbarao's extension would be the right decision to make.