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Thus spake the RBI governor

business Updated: Jul 28, 2009 21:04 IST

As far as Duvvuri Subbarao is concerned, it is the credit flow and inflationary pressures that would make the central bank re-look at the monetary policy in the near future. Here are his takes on some key issues.

On the banking sector
Bankers felt the status quo on policy rates would anchor interest rate expectations and spur investment demand. They expect credit demand to pick up in the second half of the year. I stressed the need to increase credit flow especially to agriculture and MSMEs.

On restructuring loans and NPAs
The purpose or intent of restructuring is not to hide any thing but to help give liquidity support to sectors that are otherwise unviable to reach, so that they can get over the difficulty. For such type of loans, there is a need to give a certain amount of floating provision. So there is sufficient risk management behind the restructuring.

On banks’ response about rates
As liquidity remains ample, the competitive pressure on banks to reduce lending rates has increased. Consequently, the transmission of policy rate changes to bank lending rates has improved since the last annual policy statement in April.
As the short-term deposits contracted earlier at high rates mature and get re-priced, it opens up room for banks to further reduce their lending rates.

On the liquidity position
Our actions to maintain ample liquidity in the system since September 2008 have resulted in augmentation of actual and potential liquidity of over Rs 5,61,700 crore.

The liquidity system has remained comfortable since November 2008, and its expansion has been consistent with RBI’s stance of ensuring a policy regime that will enable credit expansion at viable rates while preserving credit quality.

On high government borrowings
Management of the large market-borrowing programme in an orderly manner requires active liquidity management and accordingly, the Reserve Bank indicated its intention to purchase government securities under open market operations (OMO) for an indicative amount of Rs 80,000 crore during the first half of 2009-10.

The OMO undertaken so far have been of the order of Rs 33,439 crore accounting for about 42 per cent of the notified Rs 80,000 crore. There is therefore sufficient headroom available to the Reserve Bank to manage the balance borrowing smoothly.

On the monetary policy’s stance
For the remaining year our stance would be to manage liquidity actively so that the credit demand of the government is met while ensuring the flow of credit to the private sector at viable rates.

Secondly, keeping a vigil on the trends and signals of inflation and be prepared to respond quickly and effectively through policy adjustment, and thirdly to maintain a monetary and interest rate regime consistent with price stability and financial stability supportive of returning the economy to a high growth path.