RBI governor plays it straight

Third Quarter Review of Annual Statement on Monetary Policy for 2006-07

The general feeling among market players is that the Reserve Bank of India (RBI) governor Yaga Venugopal Reddy surprised them by keeping the reverse repo rate (the rate at which it borrowers overnight excess funds from the banking system) at 6 per cent.

But for Reddy himself the decision to raise only the repo rate (the rate at which it lends overnight money to banks) wasn't surprising, as it was in keeping with its policy focus of keeping liquidity tight.

Here's are Reddy's views on what he thinks about the decisions taken by the central bank in the quarterly review:

Repo rate hike was contextually appropriate as the central bank's intention was to withdraw monetary accommodation (given high money supply growth fuelled by unprecedented credit grow for the third year in a row).

It is wrong to think that containing inflation will hurt the growth. In fact, high inflation dampens growth. The steps (to contain inflation) are meant to maintain the growth momentum (in the Indian economy).

The central bank used three sets of measures to curb inflationary pressures and target lending to overheated sectors "" monetary (through the repo rate hike), prudential (through increase in provisioning for exposures to the sensitive sectors) and management of capital account (by seeking to curb flow of foreign exchange by way of investments by NRIs in bank deposits).

There is general atmosphere of monetary tightening and Asian economies managing capital flows are to be noted.

There is a re-emphasis on credit quality. We prefer exposure to real estate, credit card receivables, consumer loans and capital market be restrained. We don't want the banking system to develop vulnerability. There is no increase in provisioning for residential housing loans as it is important at this stage of development and demographics of the country.

In general, we notice supply conditions are better, and therefore we find GDP growth revised upwards to 8.5-9 per cent from 8-8.5 per cent in October. Demand pressures have intensified. Policy priority therefore is to try and bring the inflation closer to the range of 5-5.5 per cent and to contain and moderate inflationary expectations.

Monetary policy operates with a lag. The measures undertaken are on top of accumulated lagged effect of measures already undertaken since 2004.