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‘Both supply and demand factors behind inflation’

business Updated: Apr 29, 2008 21:30 IST
Q&A | YV Reddy

Reserve Bank of India Governor Dr Yaga Venugopal Reddy spoke to BS Srinivasalu Reddy of

Hindustan Times

in an interview after the announcement of the Annual Credit Policy. Excerpts:

The economy seems to be slowing down. But you have kept growth projections at 8-8.5 per cent. Is this growth expectation realistic?

We used to keep our expectations lower than the realistic figures many a time in the past and people termed our projections as conservative. These figures are based on disaggregated data collected by us. These are realistic numbers. Agriculture is expected to grow at 3 per cent, services are set to maintain above 10 per cent, while the industry is still capable of delivering 9 per cent growth – all these add up to 8.5 per cent.

What is stoking inflation in the economy?

Both demand as well as supply factors are present. Some supply and some cyclical factors are in operation. We have to take all factors into consideration. We cannot ignore inflationary expectations (expected future course of inflation).

Within a couple of weeks RBI has hiked the cash reserve ratio (CRR or the money commercial banks have to keep with RBI) twice. Was there a need to stagger the hikes?

While monitoring liquidity we observed that overnight the reverse repo (the rate at which RBI borrows money overnight from banks) shot up. We thought that a 50 basis point s hike in the CRR was warranted. The liquidity conditions were changing from then induced by volatility in government cash positions and foreign exchange inflows. We had to study cyclical and other volatility scenarios underlying such liquidity. At that time we did not want to appear too vehement. We thought it was better to be approximately right, instead of precisely wrong. And the present rise was effected after ascertaining it was warranted.

Extending the same logic, could we expect another hike in a month or so?

Not precisely so. There are four instruments available to RBI – CRR, open market operations, market stabilisation scheme and liquidity adjustment facility. We’ll see which to use.