?Managing liquidity has become the most challenging task?

Excerpts from RBI governor YV Reddy?s press conference

We have to remind ourselves that our growth is basically domestic demand driven. We also have recognized generally that over 90% and in more recent years over 95% of investment in India is from domestic saving. So, our priorities are domestic inflation, inflation expectations, domestic investment saving balance and domestic financial stability.

The global factors are no doubt relevant, they are important; they are getting to be more and more important, but we cannot ignore the fact that the predominant consideration for the policy has to be the domestic economic system. When we look at the global development we have to recognize that global output trend is reasonably encouraging.

But global inflation seems to be a matter of concern. There is heightened concern on global financial markets. A global trend in monetary policy is continuation of the withdrawal of the monetary accommodation. In the macro situation, there is confidence in the medium and the long term about the economy?s growth. We cannot ignore some of the macro aspects and hence we have to compare with other emerging economies.

On current priorities:

At the current juncture, we decided therefore that we should continue with the vigil on price stability. We have to assess the evolution of financial balances in the country. Operationally, managing liquidity becomes the most challenging.

Positive on growth:

When we look at the recent past and were to look at the economic performance, you should also look at the future that grows continuously strong. The numbers are very good. Growth impulses are strong and we have every reason to look positive on growth.

On inflation:

In some senses, I would concede that inflation is out of newspaper headlines. But is it in the minds of the people? We believe that there is still a fear of high inflation in the minds of the people. And extremely important that it is addressed in terms of inflation expectations. This is not only a matter of anecdotal evidence, but I think there is still a fear of high inflation. It is true that we have some factors which would indicate as modulating inflationary measures. For example, the credit growth, there?s been some amount of rebalancing in the bank?s balance sheet. It is also true that there is some evidence of some supply elasticity and improving the output. But we have to recognize that inflation expectation has to be dealt at.

Second, the Indian economy is attempting further liberalization which is right and the more we are pursuing global integration, which is inevitable, it is also necessary for some of us, and I believe RBI in particular, to express the importance of bringing inflation to levels that are consistent with global leading economies.

Keeping this background in view the vigil on price stability has to continue. Then contextually also, it is important. Contextually because, the oil prices are showing up and there is no clear evidence as how much the permanent component and how much is temporary.

Therefore, it is always prudent to assume that everything is permanent till it is proved otherwise. There is some evidence of pressures in some pockets. Above all, we should also take into account the cost in future of possible excess liquidity unless it is managed timely so that the demand pressures are not heightened. So, managing appropriate liquidity again comes back as the new policy issue in the current context. We have also flagged off the issue of financial stability primarily because of the recent turbulence of reforms in the global financial markets.

On concerns over portfolio inflows:

There are two kinds of FII inflows:

The FIIs which come on their own account and FIIs which come through other accounts, which are essentially portfolio flows other than FIIs. This type of capital has to be taken into account in looking at financial balances. If we look at the international investment position, it could be called impressive. Although nothing has happened on the issue of participatory notes, we have expressed our concern.