Surplus liquidity has increased banks? investment exposure in mutual fund instruments to Rs 45,048 crore during the period April to July ?07 as against the previous year?s comparable period?s Rs 15,902 crore.

Addressing mediapersons on the first quarter review of the Annual Monetary Policy, 2007-08 on Tuesday, YV Reddy, governor, Reserve Bank of India, said the RBI would consider initiating action against those banks increasing exposures in equities. These banks, though they were making higher provisions, remained a concern due to the quality of assets. When asked whether action against such banks would include penalties, Reddy said, ?Usually a round of discussions brings about the desired effect.??

The money market has been volatile, which, among others, include factors like excess liquidity due to large capital inflows that even the RBI finds it difficult to estimate. While inflows remained a concern, the other task the RBI has been struggling with is to improve outflows and maintain some equilibrium. The RBI has, therefore, encouraged those outflows that enhance corporate productivity?meaning corporates that acquire companies outside the country.

This would absorb some of the liquidity inflows unlike other countries that pinch into their wealth capital.

The major task before the RBI, therefore, is to maintain financial stability, Reddy said. ?There is a fear in the minds of the people on rising inflation,?? Reddy said. ?The RBI focus is on households and keeping inflation under five per cent,? he said. On the fall in housing loans, Reddy said that credit allocation has been given up and the RBI only prescribes loans under priority sector lending. ?Three years ago, we encouraged banks to increase their retail housing loan portfolios because the base was low. There is no allocation as such and banks have to follow prudential guidelines,? he added.

There were factors indicating moderation issues related to non-food credit, evidence of supply restraints. Since the economy is further liberalizing, higher inflation does have inherent risks and it is necessary to maintain a vigil on price stability to contain it, Reddy said. Non-food credit, year-on-year was lower at Rs 367,258 crore (24.4%) as of July 06 compared with the previous year?s Rs 370, 899 crore. On a financial year basis, non-food credit declined Rs 12,094 crore during the current fiscal (as of July 6, 2007) in contrast to the increase of Rs 36,654 crore in the corresponding period of the previous year.

There has been some rebalance of credit deployment. Bank credit to agriculture during 2006-07 was the highest at 32.4% followed by services sector at 31% and growth in housing and real estate decelerated modestly to 24.6% and 69.8%.

While for the current year up to may 2007, high credit growth to agriculture continued but there was a deceleration in credit to housing, real estate and personal loans.