Any instrument constrains banks

Updated: Apr 30 2008, 06:47am hrs
Yaga Venugopal Reddy articulates the nuances of his Annual Policy Statement for FY09, in an interview with FE. Excerpts:

You are seeking to attack inflation without trading growth. Is that a fair assessment

I have given the analytics. I am keeping the options open to be able to respond, depending on the situation, with well-defined priorities that will govern our actions.

What do you think banks will do now on interest rates

It depends on what the banks want to do. It is not necessary that every bank should pass on every increase on a one-to-one basis. If you just go back five years, when it was down, there was stickiness. Upward also, there is stickiness. But the stickiness is more when it is down, and less than when it is up! Thats the incentive, given the profitability. Thats a fact of life. From our point of view, we can only move up to a point. We cannot dictate.

Banks have also been seeking interest on CRR

By law, I cant do it. The law was amended so that I cant give permission to do it, because thats the best way of making CRR effective. How do you make it effective if you pay interest Let me tell you, any instrument that I have is a constraint on the banksthe more effective my instrument, the more the complaints from the banks.

What is the broad signal you are sending to the financial markets

The broad signal is, underlying growth strengths are there in the economy. There is underlying strength of savings-investment balance, productivity growth, investment demand, sentiment and consumer demand, though it is slightly less. Even after taking into account global moderation, it should still be 8-8.5%. If you see sectoral disaggregation also, there is strength. The services sector is being talked of at around 10%, manufacturing sector 8-9% should be on the cards.

I think if you look back one year, there was a period where the US was fighting a slowdown, whereas we were trying to moderate growth. There can be a divergent trade cycle even in a global situation. Even if you see the so-called growth moderation, it is divergent in different countries. Directionally, it is similar because of globalisation. There is a divergent growth path. If you see the increase in prices globally and in our economy, there is global inflation, to that extent there is some pressure. But if you see the magnitude, they are very different.

What is your view on the current decoupling debate

In the beginning, some people argued there is decoupling. Personally, my stand was that decoupling is contextually convenient but inherently illogical. Because if there is globalisation, everybody is benefiting from it. If there is a problem somewhere, then you have to have an impact. But contextually, youd like to think otherwise feel good. Countries like India, which are less integrated and have healthy domestic demand, may be less affected. But we will be affected.

When the financial turbulence took place, there was a view that it was a liquidity issue, not a solvency issue. But now, there is a realisation that it is a solvency issue. Similarly, now there is a realisation that there is no decoupling, but there is divergence. The divergence is in terms of the magnitude, not in terms of the direction.

have aimed at bringing inflation down to 5.5% in FY09. Given the situation, dont you think its an ambitious target

There are two important caveats. One, that the global situation will be according to the central scenario; and second, that normal monsoon conditions prevail. Then, I am reasonably confident that well hit 5.5%. If oil prices hit $150, for instance, then the calculation goes awry.