Reserve Bank of India Governor Y V Reddy took time off from his hectic schedule to talk to Business Standard on Tuesday. Excerpts from the interview:

The repo rate is lower than both the one to three-year deposit rates and the lending rates. Shouldn't the repo ideally be between the deposit rates and the lending rates?

In normal circumstances that is true. But these are extraordinary circumstances, characterised by volatility in government balances and volatility induced by the external account.

On account of these volatilities and the requirement of rebalancing of banks' portfolios, the rates for both deposits and lending have become pretty volatile now.

Deposit rates have moved so much that it is very difficult (to keep pace) and often the rates that you find can be misleading. Therefore, we are not in a position to take that as a guiding criterion.

Is there a need for the currency management policy to be changed as far as monetary management is concerned?

The exchange rate policy has served us very well in the last so many years and the exchange rate has been commended all around.

It has served the purpose of growth, stability, and external sector balance and there is no need to change any element of the exchange rate policy.

Do you feel the dynamics in inflation have changed to being more supply-based. If so, is it appropriate to emphasise money supply and credit controls?

Inflation dynamics have changed because of globalisation. Prices are determined by the most efficient producer globally. We will have to take it from there, unlike in the past, and that makes it more complicated.

Secondly, you will find that measuring inflation is becoming a problem because asset prices are not calculated in inflation, yet assets are becoming important to economic activity and the impact of liquidity on assets is also becoming an important issue.

So in that sense inflation measurement as traditionally known is becoming less relevant than before.

The third problem is in the context of the structural transformation. While inflation dynamics are new globally, it is more complicated domestically for India. And in that context monetary policy transmission becomes more difficult.

Do you think the RBI should have been more gradual in monetary tightening over the last three or four months?

Basically, you have to assess at what point of time you are looking at the anticipated demand considerations, and there is a lag effect. Now, a lag cannot be quantified easily. But when we look back, the RBI was one of the earliest public institutions that flagged the problem in terms of inflationary prices.

Actions have been taken in a gradual manner and it is true that after some actions there are more intensified actions. For a long time in our country we did not experience continuous growth.

So, it took a little time for the market participants to fully appreciate the importance of the measures that the RBI took.