RBI governor Yaga Venugopal Reddy spoke to the media after unleashing the double-whammy of hiking CRR and the repo rate. He aggressively defended RBI’s actions, and explained how the central bank views the country’s economic conditions.
Reddy, who is scheduled to demit office at the end of August, also outlined the major achievements of the past four years, stressing the collegial nature of decision-making at RBI: “The governor is the public face. But decisions are taken collectively.” Excerpts:
On the trajectory of inflation: Our internal analysis indicates that barring any further shocks, particularly global, headline inflation for the next few months will be around current levels. Rather, in the second quarter of the current fiscal and first part of the third quarter, it should be around this level. From the second half of the third quarter, it will start moderating. And by the end of FY09, we see it at around 7%.
On banks and credit growth moderation: Basically, it is a continuation of the management of aggregate demand. In the area of credit growth, we have been urging banks to fall in line and have been urging them to contain credit growth. In essence, therefore, this is a clear-cut indication that the financial system will have to fall in line.
On the common borrower being affected by the rate hikes: You go to the market, the price of rice has risen, dal has become costly. So, shouldn’t the price of money rise? There has to be a balance. When the prices of commodities increase, and you wish the price of commodities wasn’t this high, do you want the price of money not to increase?
So many people have rice, but how many people take loans? Who is the priority? Those who eat rice or those who take loans? For price stability, if interest rates have to be increased, we will have to do that. Balance sheets may be affected, but isn’t dal-chawal more important?
On moderation in growth: This is a very, very marginal moderation and less than the moderation in the rest of the world. We will continue to be the second-fastest growing economy in the world. Currently, there is an exaggerated bearishness on various aspects. This is as dangerous as exaggerated bullishness, which in some ways is the reason for what we are today.
On the intensity of fighting inflation:
There are some who believe we should fight it with greater vigour. In that case, there could be greater disruption. There are also some who believe we should go soft. But if we go soft, then growth itself could be disrupted. In our view, by and large, the financial sector will be able to comfortably manage this kind of nuanced aggregate demand.
On how low growth could fall:
Earlier too, half the people said it will be above 8%, the other half say it is below 8%. We are broadly in the range. Whenever we talk about growth, we have always been conservative. It’s based on our analysis, and we are reasonably comfortable it will be around 8%. The economy has underlying strengths to grow at this rate.
On whether the RBI measures will hit growth:
It is still too early, but by and large, if the idea is that because of the stern measures on inflation, growth could be affected with a one-year lag, I would say if we do not take stern measures now, it could lead to such inflation that it might disrupt growth.
Over the last four years, we have been seen by some as emphasising inflation and underplaying growth. But, by and large, we have taken as many informed decisions as possible. Nobody’s perfect, but we take as much information as possible, analyse it, discuss it with market participants, but the most important thing I want to emphasise is our numbers are essentially based on forward-looking macro analysis without any particular predilection.
On RBI’s relationship with the finance ministry in fighting inflation:
We are always in sync with each other. There is no question about it. As you have seen, we keep discussing with each other, normally and also before the policy.
On whether banks will be affected by increasing delinquencies:
We have already asked them to keep more capital. When they keep capital, they can tackle it.
On banks’ profitability being hit:
Three to four years ago, banks had said they would be in trouble as interest rates rise. They said profitability would be hit. But profitability has increased and is increasing. Stock market variations may take place. But as far as the sector is concerned, you cannot say the profitability of banks has not increased in the past four years.
Banks, by and large, are strong and healthy; they have been helping growth. This shows that whatever pain and non-profitability fears there might have been, the outcome was not consistent with the complaints. All can say is, every time medicine is given, and people have considered it to be bitter, in the end they have turned out to be healthy.
On whether he will present the half-yearly policy review in October:
( Laughs ) The governor of RBI will present the next policy review.
