The Hindu Business Line : We will tame inflation and grow 8.5%, says Reddy

Mumbai, April 29 At the fag end of a hectic day that involved presenting the Monetary Policy for 2008-09, an almost two-hour long press conference and a series of personal interviews with different newspapers, Dr Y. V. Reddy, Governor, Reserve Bank of India, was still fresh and raring to go when Business Line met him. The amiable Dr Reddy explained the assumptions behind the policy he unveiled today and also answered questions on the forex derivative exposure of banks and on NBFC regulation. Excerpts:

You have assumed a growth rate of 8.5 per cent for the current fiscal, inflation at 5.5 per cent, credit growth at 20 per cent and deposit growth rate of 17 per cent. Do you think the growth rate is ambitious in the given scenario?

What you have to do is see if they are compatible in terms of standard relationships. So my target is to take inflation down to 5 per cent. In fact, the effort should be to bring down further.

We are trying to make an assessment based on savings-investment balance, subsisting demand conditions and supply elasticity. Based on these, the inherent growth capability is 8-8.5 per cent. If that is the growth rate, I have to bring down the inflation through demand management but it should be consistent with the requirements of growth also. In doing so, we have to go to 5.5 per cent inflation.

What matters is the direction. If you take credit growth, it was 30 per cent last year and I said bring it down. Again, direction is important; the pace should be reasonable. We don’t want to be disruptive. Directionally credit growth should not be more; if at all it should be a little less or at the same level as the last year. Money supply should be less because of the pressure on inflation. There is no pretension to precision, but these are broad orders of magnitude which are mutually consistent and in conformity with our policy objective.

So then, how do you think banks will reconcile this? If they don’t increase interest rates, they have to cut down on deposits….

Not necessarily. They can take a squeeze on profits. If you see the profitability of banks, it should be possible for some of the banks to absorb.

In the context of exotic currency derivatives, you said that you have started inspection of banks. Have you been able to get an idea of the scale of the problem?

The inspection is going on and it will give a detailed picture. But preliminarily we had a discussion with banks and got an assessment based on what they told us. On that basis we came to the conclusion that it is not a systemic issue and there are some differences at the individual level between some banks and corporates.

Our stand is that the guidelines are very clear and as long as banks follow the guidelines we have no problems. There should be no scope for disputes also.

As for the scale of the problem, the point is that the gross volume of the transactions is different from the obligations. At the moment I may not be in a position to say anything. If the contracts are not being questioned, then there is no issue. On the basis of the information given to us by the banks and based on our current assessment if any additional capital or charge is required for these disputes, it is possible for the banks to accommodate within the existing capital because the banks which have done this are fairly strong.

On the exposure of banks to commodities, there is talk of a supervisory review…

As I said, we are asking them to give us the information on the scale of their exposure to commodities. It is something that has come up in the last 2-3 months and we want to ensure that there is no misuse of bank funds. Once we get the information, we will know but the fact that we are looking at it will itself make them cautious which is anyway one of the purposes of our asking.

Are you thinking of selective credit controls?

We will see how things work but our preference is not selective credit controls. We prefer the banks to on their own look at it carefully and then if they are satisfied with what is being done there is no better way of doing it. Selective credit control is not the first but the last resort for a complex issue like this.

An important area of focus seems to be tightening of NBFC regulations…

We are talking of non-deposit-taking NBFCs which are systemically important. These institutions were not under our eye because they were not accepting public deposits. But now we find that they have become so big that they may affect financial stability.

Two years ago, we started asking for information from them. Therefore we are careful to identify systemically important NBFCs and from last year we have started getting information.

Now we want to revisit by virtue of the global experience and by virtue of the fact that it is expanding rapidly. It is not the depositor protection angle but the system stability angle. Basically, our position is that they have adequate capital infusion so that they do not threaten the financial stability.

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