The Hindu Business Line : `We want to ensure India will be island of stability

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Home Page - Monetary Policy
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Industry & Economy - Economy
`We want to ensure India will be island of stability

Strange, unusual things are happening globally: Dr Reddy

Spelling out the objectives: Dr. Y. V. Reddy, Governor, RBI; and his deputies - Mr. V. Leeladhar (right) and Dr. Rakesh Mohan, at the RBI headquarters in Mumbai on Tuesday.- Paul Noronha

Our Bureau

Mumbai, Oct. 30

"I recall that sometime back, after the Asian crisis, someone told me, "You (India) are an island of stability in a sea of turbulence in the emerging markets."

After ten years, if similar global turbulence happens, our objective is to ensure that India will be an ``island of stability', said Dr Y.V. Reddy, RBI Governor, Reserve Bank of India, talking to Business Line after announcing the mid-term review of the Monetary Policy which had "liquidity management' as its main thrust.

"We do not know what will happen globally, but there are strange things that are happening globally, unusual things. How it will affect us we don't know. It will have less impact than on most other countries. But if it is such an unprecedented global shock, the policy has to be all placed together and we should be in readiness."

On how far the hike in CRR would take care of liquidity management:

"It takes care of liquidity overhang only partly. As far as domestic liquidity is involved, we have a combination of measures, which we have indicated and are taking.

Domestic conditions seem to be comfortable by and large. They are broadly in alignment with whatever we wanted at the beginning of the year.

One area which required some intervention was liquidity and we are taking it - whether it is MSS or LAF. There are three instruments and at some stage if we require OMO also we will use it. So far, I am not taking a view of future capital flows. We have only taken into account the existing overhang.

We are trying to suck in roughly half of the existing overhang and we will see how things evolve, rather than assume something will happen or not happen."

On the rise in asset prices, and banks' exposure to real estate and off balance sheet exposure; why were there no measures in the policy.

"There are no measures as such. As far as asset price growth is concerned, we cannot ignore it. It has some effects and the banking system has to be protected against any serious problems of exposure to asset prices.

We sensitise, we ask for higher risk weights and higher provisioning. To that extent, the system as a whole is less vulnerable. Already, some banks have indicated that there have been loan defaults in some of these areas. But they may not be as affected because they have already been warned. But with some banks where the growth is high, we want to be doubly sure. What we can do is examine the banks and advise them. But some banks. they may have grown fast.We just want to alert them. We don't want to do micro-regulation but we don't want the contagion effect."

About the self-regulatory mechanism in some developed markets:

"Studies have shown that if the real sector, financial sector and fiscal sector are not developed then capital account liberalisation may have more risks than benefits. So, that is the threshold. The question is whether we are below the threshold or above the threshold.

If you are above the threshold, then all the developed markets correct themselves. So the right price is formed quickly.

When the markets are welldeveloped, there will be a selfcorrecting mechanism. If the self-correcting mechanisms are there, then there will be no global instability.

On SEBI's measures on Participatory Notes:

"It is not appropriate for us to comment. The limited point is how do we achieve the objective in a non-disruptive manner. The concerned authorities will handle it better and they also know better."

On the real sector's capacity to absorb capital flows

"Generally, this absorption capacity cannot improve in a matter of months. It would also depend on the overall investment climate, projects, contract enforcement mechanisms etc.

But our investment rate is quite high, savings rate is quite high. We require investments to take care of domestic savings as well.

The objective of the management of the Indian economy is not to somehow absorb external capital. The objective is to grow, encourage domestic savings, encourage domestic demand and encourage appropriate savings and investments.

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