'Inflation is a concern'

RBI Governor D Subbarao spoke to the media after presenting the monetary policy. Excerpts:

On inflation
Our stance is to manage price stability, financial stability and support growth. However, the immediate priority varies from time to time. At the current juncture, inflation is a concern. But we have determined that the balance of judgement is to continue with the accommodative monetary stance, while withdrawing some of the measures which are not being utilised. In terms of indicators, we will look at inflation, we will look at growth indicators, capital flow, imports.

6.5 per cent is our best estimate of WPI inflation. We hope that it will come down.

On further scope for banks to cut lending rates
Yes. First of all, it is not that banks have not reduced lending rates — they have reduced their lending rates. For e.g., effective lending rates have come down from 12.3 per cent in March 2008 to 11.1 per cent in March 2009. While I agree that there is scope for lending rates to come down, it must also be appreciated that lending rates have come down. Because the monetary policy is still in an accommodative stance banks will further ease lending rates.

On open market operations (OMO)
For the first half we gave a very specific calendar for OMO because we thought it was necessary at that point of time to manage market expectations. Now, the situation is quite different because the remaining borrowing of the government is Rs 60,000 crore. The states government borrowing will be a maximum of Rs 1,00,000 crore. The amount of borrowing is limited and there is enough liquidity in the system, so we didn’t think it necessary to give an OMO calendar. On the way forward, we will use OMO not only to inject liquidity but also to suck liquidity.

On increase in provisions for commercial real estate (CRE) exposure
The amount of non-food bank credit going to commercial real estate is very small, I believe around 3.7 per cent. However, our decision was prompted by two considerations. First, the rate of growth of credit through CRE has been accelerating at one of the fast rates. Second, we looked at the restructuring done by the banks. These two consideration prompted us to raise the provision requirement for the real estate sector.

On Statutory Liquidity Ratio (SLR)
For the very long-term, our stance continues to be that SLR should reduce going forward. Eventually, we would like to pull SLR down. However, what we have done this time is to reverse what was done in the wake of the crisis.

If you remember, lowering SLR was the very first measure to ease monetary conditions.