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Keen to prevent potential imbalance: Reddy

THE RBI HEADQUARTERS in Mumbai. - Paul Noronha

Mumbai , April 18

Dr Y.V. Reddy surprised at least a section of the market participants who expected a hike in the reverse repo rates. In the annual policy statement announced today, the RBI Governor left all key interest rates unchanged and focused on ensuring the quality of bank credit to prevent any asset bubble. Dr Reddy explains the rationale of his actions in an interview with Business Line.

You have left all key interest rates unchanged. In January, you hiked reverse repo by 25 basis points as a pre-emptive move to contain inflationary expectations. You still seem to be worried about the impact of rising oil price on inflation. How do you explain your current policy decision?

On the oil prices, the assumption we made is on the basis of a price of $60 per barrel. Anything that happens on the pass-through may not occur fully. Some part may occur in the next one year. Some second order effect may also come. In aggregate, this could account for a 150 basis points to the inflation. Which roughly explains the difference between the current inflation, which is less than four per cent, and the possibility of reaching it at 5-5.5 per cent. Even to keep it at that range, we have to contain the inflation expectations. We have to ensure that the aggregate demand does not go out of control and also ensure that there are no other developments globally.

In the given circumstances, the policy stance was to ensure a monetary and interest rate environment that enables continuation of growth momentum consistent with price stability, while being in readiness to act in a timely and prompt manner on any signs of evolving circumstances impinging on inflationary expectations.

Do you see an asset bubble in the real estate sector?

We are not taking any view. There are two sectors: Real estate and housing; real estate is a cause for concern as the credit growth is 84 per cent. On housing, there is a view that houses to the middle-class should be given priority. Therefore, credit up to Rs 15 lakh continues to be in the priority sector. And we have not touched this segment. However, concerns were expressed in our discussions with industry associations even with regard to banks' exposure to residential housing. Hence, our decision to increase the provisioning on loans above Rs 20 lakh. We would be willing to revisit this, if needed.

Do you have any evidence that the bank funds are diverted to capital market through NBFCs?

Our studies in the past showed no direct exposure of bank funds through NBFCs into the capital market.

However, we have to look at indirect exposure. Some banks would have invested in NBFCs through instruments such as CPs. There could be the possibility of such funds finding their way to the capital market. Let me make it clear that it is not that we are taking a view on the capital market valuation. We do not take a view. But we want to minimise the risk to the banks' balance sheets. With this objective, we have increased the risk weight on exposure to commercial real estate and included banks exposure to venture capital funds as capital market exposure.

While discouraging flow of funds to real estate and capital markets, do you expect a higher inflow to the agriculture sector?

The measures announced by us are expected to moderate the credit growth in the current high-growth sectors such as real estate. At the same time, we expect that credit to agriculture will continue; in fact, do better. Agriculture, small and medium industry are high priority segments for employment.

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