G Seetharaman

Mumbai: Belying expectations from analysts and the media, Reserve Bank of India (RBI) governor Y V Reddy upped the cash reserve ratio (CRR) by 25 basis points on Tuesday. This hike comes close on the heels of a 50 basis points hike on April 17. The latest rise will be effective from May 24 this fiscal. Following are excerpts of Reddy’s interations with the media a few hours after the policy announcement.

Why do you think an inflation rate of 5-5.5% is acceptable for India when it is below 4% in most advanced economies?

What is realistic is different from what is acceptable. We have very clearly indicated that if we want a successful, optimal financial integration, we should go towards an inflation rate of 3%. But to reach 3% so many other things have to happen and that is what we are working towards.

We should also note that the weight of food items on the inflation index of advanced countries is less than in developing economies.

Inflation should begin to moderate in the next 2-3 months following fiscal and supplyside measures taken by the government and the RBI’s own monetary measures. CRR was hiked just a few days back. Why another hike?

When we look at CRR, we make an assessment of liquidity in the coming months. In managing liquidity,we have three instruments - the liquidity adjustment facility (LAF), the market stabilisation scheme (MSS) and CRR and each has its own impact, effectiveness and burden. After considering all these, we have taken this decision based on the anticipated liquidity position in a few weeks.

Analysts expected a hike in the repo rate and are shocked by your move to increase CRR. Your comments.

I was told that in a survey, 62% of analysts said there would be a repo rate hike, so I just wanted to surprise them (laughs). I am not surprised by my actions, but by others’ expectations.

What are the specific concerns relating to non-banking finance companies (NBFCs) that you are trying to address?

We are looking at their leverage and the risk they are taking in relation to their capital adequacy. Will the RBI ask banks to declare their forex derivative losses?

It is not mandatory for them to do so. There is an inspection being carried out on the issue. As far as our current assessment is concerned, since there is a dispute going on in the courts on this issue,we are only monitoring the situation. Do you think the supply-side pressure is becoming more prominent?

As far as manufacturing and services are concerned,we believe substantial investments have taken place and productivity has improved. Therefore, there has to be significant relief on the domestic front. As far as the agricultural commodities are concerned, much will depend on the monsoons. Our expectation is that the monsoons will be normal and the pressure on commodities will ease.

Your comments on the government’s plans to convert oil bonds to statutory liquidity ratio (SLR) bonds?

Generally, our stand has been that only central and state government borrowing programmes have SLR status and oil and fertiliser bonds do not.

Last year you said that there would be a committee on the inflation index? What has happened on that front?

The government is working on it and we look forward to updating the index.

Source : DNA