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Author : G Seetharaman/DNA
Content : On Tuesday, Reserve Bank of India governor Yaga Venugopal Reddy released the quarterly monetary policy review, as part of which, he hiked cash reserve ratio by 25 basis points and repo rate by 50 basis points. Following are excerpts from Reddy's interaction with the media:

You said the year-end inflation number could be 7%, up from 5-5%. Do you have a trajectory in mind?

Our internal analysis indicates that barring any further shocks, particularly globally, headline inflation for the second half of Q2 and the first half of Q3 should be around the current level. From the second half of Q3 it should start moderating. In Q4 we are quite confident we will be able to bring it down to 7%.

What do you think will be the impact of the rate hikes?

Basically, it is a continuation of the management of aggregate demand for quite some time now. This should have a sobering effect on demand. In the areas of credit growth and credit-deposit ratio, we have been expecting banks to fall in line with the monetary policy objective. We have been urging them to contain credit growth. We may even undertake a supervisory review of banks. In terms of impact, growth should be 8-8.5%. Compared to growth rates around the world, it is a very marginal moderation. We continue to be the second fastest growing economy in the world. Most importantly, this growth is consistent with stability. Currently, there is exaggerated bearishness on various aspects, which is as dangerous as exaggerated bullishness, which is in some ways responsible for the situation we are in today. In our view, the financial sector will by and large be able to comfortably manage this nuanced aggregate demand management.

Economists feel in 2010 growth could down to even 6.5%, which is the cause of the bearishness...

Though some people think that we are slightly more optimistic, in the past whenever we spoke of growth, we were by and large conservative. It is based on our analysis of agriculture, manufacturing and services and we are reasonably comfortable that it will be around 8%. In the last 4-5 years savings and investment have gone up. This ratio should normally assure a growth of 8%, and when there were signs of overheating, we tried to moderate them in time.

It has been admitted by the RBI and policymakers that the rate hikes will have an impact with a lag. So market observers fear it might impact 2010. So do you see a growth of 8% next year?

It is a little too early to comment on that. But if the idea is that measures to curb inflation are going to affect growth, I would say if we do not take stern measures on inflation now it will fuel such inflationary expectations that they might disrupt growth. Our numbers are based on forward-looking macroeconomic analysis without any predilection.

What is your outlook on the rupee given that the current account deficit is expected to widen further?

We expect the capital inflows to meet the deficit. As far as the fundamentals are concerned, there is no reason to believe that things will be significantly different from what they are now.

Your macroeconomic report said household savings have slipped. Should we not be worried?

I would not say a marginal reduction in consumption expenditure or savings is the beginning of a trend. Household savings in India are perhaps among the highest in the world. But, in reality, what we require and what we expect is the continuation of the trend of increasing corporate and government savings. In corporate savings, the public sector plays an important role.

Are the rate hikes pre-emptive?

We have been taking a series of pre-emptive measures, an example of which is the CRR hike. It is forward-looking and pre-emptive in various degrees depending on the circumstances.

Is your supervisory review of banks' credit portfolio questioning their right to take their own decisions?

Not at all. On the contrary, we have to recognise the three reasons for such a spike in inflation: First is the supply side, second is the demand side and third is the transmission mechanism, which is through banks. These are the three areas we have to attend to.

What do you want to say to consumers who are worried that their EMIs will go up with every rate hike?

The cost of rice has gone up, so has the cost of dal. Is it not necessary to increase the cost of money to ensure there is a balance? That is what we are doing. To ensure price stability we have to increase rates.

Many people are now not able to repay their loans and NPAs of banks have gone up in Q1. What are you doing about this?

We have already told banks to set aside more capital for to meet their NPAs.

How much liquidity will the CRR hike suck out?

Around Rs 9,000 crore.

What do you make of the global uncertainty?

There is likely to be considerable slowdown in the US and Europe and uncertainty in Japan. My personal assessment is that the picture is slightly worse than the one given by the IMF's world economic outlook.

The stance of the monetary policy clearly directs banks to have stricter credit appraisals. Do we interpret it to mean delinquency levels are so alarming that the RBI has to intervene?

Not exactly. Sometime back we asked for better rebalancing between deposits and credit. Rebalance occurred, and now they are slightly going out of balance. We believe a few banks are moving too fast and too much towards non-balance. We would certainly like to interact with them more intensely. But we definitely do not believe in micro-management.

What are your assumptions on commodity prices and pass-through?

Pass-through is concerned with oil. As far as assumptions looking forward are not concerned, we do not expect any further pass-through till the end of the current fiscal year. Some felt oil prices were going to come down. We said unless the prices come down significantly, we cannot assure that there is nothing left to pass through. There is something left to pass through unless there is a significant fall in price.



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