Mumbai: Reserve Bank of India governor Y.V. Reddy is confident that 8% growth in India’s gross domestic product (GDP) will be achieved in 2008-09 and a stubbornly high inflation will come under control in the January-March quarter. Reddy spoke to reporters after unveiling what should be his last RBI quarterly review of monetary policy. Edited excerpts:
Our internal analysis indicates that barring any further shocks, particularly globally; the headline inflation will be around the current level in the second quarter of the current fiscal year and first part of the third quarter.
Battling inflation: Flanked by deputy governors V. Leeladhar (left) and Rakesh Mohan, Reserve Bank of India governor Y.V. Reddy addresses the media in Mumbai after releasing the monetary policy quarterly review
Whether it is higher or lower (than now) will be very marginal. From the second half of the third quarter, it should start moderating and we are quite confident that by fourth quarter we should be able to bring it down towards 7%.
Based on our analysis of agriculture, industry, services, we are reasonably comfortable that it would be around 8%. The economy has the underlying strength to be able to grow at around 8%. Compared with the drop in growth rate all over the world...this is a very marginal moderation and definitely less than the moderation in global growth.
We will continue to remain the second-fastest growing economy in the world. It is most important that this growth is consistent with stability. There is an exaggerated bearishness on various aspects. Exaggerated bearishness is as dangerous as exaggerated bullishness, which is somewhat responsible for what we are seeing now.
On RBI actions
Whatever actions we take, they are effective, with a lag. But, if we do not take stern measures now, it is going to fuel such inflationary expectations that it might disrupt the growth, as well as stability.
Basically, it is a continuation of the management of aggregate demand that we have been undertaking for quite sometime. We believe that this should have a sobering affect on demand, in particular, in the area of credit growth.
Everytime, a medicine is given, people have considered it to be bitter but, at the end of it, they have turned out to be healthier.
As far as the overall liquidity is concerned, from a monetary policy stance, liquidity should be tight. Our objective is to keep it tight.
We have been expecting banks to fall in line with the monetary policy. We have been urging them to contain the credit growth. We have already indicated in the policy that we may even take supervisory review of banks. Therefore, this is a clear-cut indication that the financial sector will have to fall in line.
In our view, by and large the financial sector and the balance sheets of banks will be able to comfortably manage this type of nuanced aggregate demand.
We do not expect any further pass-through of oil prices in the current fiscal year. By and large, the type of shocks that we went through last year as well as in the current year...it is most unlikely that it will recur again.
On oil bonds
I think we have already informed oil marketing companies that this facility is ceasing. If not ceased today, it would be ceased tomorrow. (RBI has been buying oil bonds directly from the oil marketing firms to lend liquidity support to them.)
In the market if there are uncertainties, the spread between the bid and ask increases. From a public policy point of view, there cannot be a narrow corridor, as that means public policy is taking the burden of uncertainty.
Public policy would like to reduce excess volatility but, in trying to reduce excess volatility, we should not give too much stability to the market if there are inherent issues. (There is a 3% spread with so-called reverse repo rate at 6% and the repo rate, or bank policy rate, at 9%. RBI infuses liquidity through the repo rate and drains liquidity through reverse repo.)
On more hikes
I think I will be foolish to commit... We have to look at evolving circumstances.