Banks will have to take a call; Reddy on CRR hike

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New Delhi, Oct 30 (UNI) Reserve Bank of India Governor Y V Reddy today said the policy parameteres outlined in the credit policy were aimed at maintaining the momentum of the India growth story and stated that any threats to its stability emnate more from global sources rather than domestic.

Answering a host of questions in a video-conference, Dr Reddy said the main plank of the policy was maintainig high growth with price stability.

In reply to a question as to whether the hike in Cash Reserve Ratio(CRR) from seven per cent to 7.5 per cent would result in increase of interest rates in general, Dr Reddy said the decision in this regard will have to be taken by the individual Banks themselves.

"Each Bank has to manage the consequences. Bankers will have to take the call," he said.

Dr Reddy said a key feature of the policy related to moderating net capital flows so that money supply was not persistenty out of alignment with indicative projections of 17 to 17.5 per cent.

The Central Bank Head justified retaining GDP forecast at 8.5 per cent during 2007-08. These calculations have been based on the assumption that there would be no further escalation in international crude prices and barring domestic or external shocks.

He also argued as to why the RBI had pegged inflation to be contained close to five per cent during 2007-08 while undertaking to condition expectations in the range of four to 4.5 per cent.

Stating that there was little possibility of a domestic shock, Dr Reddy said external shocks in the global economy could emerge from four sources. These are (-) escalation of oil prices, excess global liquidity, the China factor where prices have shown signs of overheating of late and global inflation.

Dr Reddy, however, said as it was not possible for the RBI to make an assessment as to where the shock in the global economy could emnate from this could not be factored into the calculations.

He said there was a belief among analysts that it would not be difficult to manage external shocks given their likely intensity, the only way out is to have better monitoring and maintain strict vigilance. The RBI would henceforth gear itself to doing this, he said.

He said moderation of capital flows was necessary to prevent volatility. Monetary factors could impinge upon the real sector.

While in the case of advanced countries this factor may not be very significant, in the case of emerging economies they could lead to big time problems.

Dr Reddy, however, said among the emerging ecnomies India was better placed than other economies to ensure that monetary changes do not spill over to the real sectors.

"The less developed an economy,the greater the voltaility," he remarked.

He said as a result of better demand and supply management, inflationary expectations have been tamed. The RBI, he said, would continue to monitor and manage issues pertaining to liqudity overhang and improve upon the demand and supply management.

To a question as to whether the Asian contagion was possible once again given the excessive capital flows, Dr Reddy said factors operatig at that time no longer persist.

It was rather difficult to indicate the nature of the contagion that was present in the global economy, but the answer to the problem lay in enhanced vigilance.


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