After surprising banks and companies with further monetary tightening, Y V Reddy explains why he is putting inflation before growth. Excerpts:
How do you see the inflation curve moving over the coming quarters? Do you think you are done with policy measures?
Our assessments suggest that the inflation is more driven by global factors rather than domestic factors. According to our internal analysis, the headline inflation will remain at current levels during this quarter. We will see it moderating from the second half of the third quarter. By March 2009, the levels should come down to about 7 per cent.
We need to understand the thee important reasons for spiking inflation -- one, the supply side, two, the aggregate demand and finally, the transmission mechanism through the banks.
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This CRR hike is a pre-emptive measure to contain the inflationary pressure. We have to see how the conditions evolve from the government side and the private sector, and how the demand growth changes before we take any further action.
The market has been bearish about policy rate revisions. What is your view?
There is exaggerated bearishness on various aspects and it is equally dangerous as exaggerated bullishness. Although the markets look bearish, the growth with companies is still well.
Continuation in management of aggregate demand will have a positive impact to strike a balance between the supply and the demand side. The financial sector will continue with slightly moderate growth for some time, but it would be able to manage low demand.
How will the policy impact credit growth?
Monetary policy is in line with management of aggregate demand and supply. On demand in areas such as credit growth and credit deposit ratio, it will have a sobering effect.
Banks are expected to fall in line with the monetary policy objective. We have been urging them to contain the credit growth and we have mentioned this in the policy today that we may even undertake supervisory review.
So, this is a clear-cut indication that the financial sector will have to fall in line.
What sort of growth are you expecting in terms of GDP?
Indian economy has the underlying strength to grow at 8 per cent. The growth is likely to be affected a bit with a lag of one year.
Although some people think that we are optimistic, according to our analysis of the agriculture and the services industry, we are reasonably confident that it would grow at 8 per cent.
Over the last four-five years, our policies have at least done one good thing -- the savings and investments have gone up. Savings-investment ratio should assure to give 8 per cent growth which is quite advisable. We still continue to be the second fastest growing economy.
Household savings have dipped. Is this an issue of concern?
Marginal reduction in the household saving should not significantly cause tension. Our household savings rate is the highest among all emerging markets in the world.
We are trying to manage the aggregate demand and the fiscal pressures. We need to be more focussed on government and corporate savings rate. However, the overall situation is still stable.
Are you indicating that the common man should get used to higher cost of living?
Dekhiye bhaiyya, aap bazaar jate hain chawal ka daam badh gaya, tel ka daam badh gaya, dal ka daam badh gaya, toh paise ka daam badhna nahi chahiye? Toh balance rakhna hai na, wahi kar rahe hain.
So, when the prices of commodities increase and if you are uncomfortable with the prices, you wish that why not the price of money increases. So ,that is the balance we are targeting.
If you want the prices of commodities to stay at comfortable levels, you may have to compromise with slightly higher interest rates. Getting dal-chawal at affordable rates is more important here.
