RBI governor YV Reddy surprised markets second time in a row by increasing the repo rate by 25 basis points and leaving the reverse unchanged.
Reserve Bank of India governor YV Reddy surprised the markets for the second time in succession by increasing the repo rate by 25 basis points and leaving the reverse repo rate unchanged.
Other key rates were also left untouched but the strong hint from the Mint road was that money henceforth would not come cheap and both banks as well as companies will have to pay more for funds. Reddy spoke to journalists hours after the monetary policy was announced. Here are the excerpts:
Why have you hiked the repo rate but left reverse repo rate unchanged?
Repo was the relevant operating instrument in the current context. The packaging of operating instruments needs to be understood, and whichever is more relevant will be used.
So do you think the other monetary instruments are less effective?
We have an array of instruments just like any of the other emerging Asian countries. They are of multiple nature and we will continue to use them when necessary.
There has been excessive credit growth possibly due to the diversion of funds from the markets to sectors such as real estate. What is the RBI doing to counter this?
We are taking action by curbing banks' lending to these sectors. But, you cannot stop them altogether as they may come through other routes. Corporate liquidity is also strong and we can't stop them. But we saw that funds for NBFCs were coming through banks and we have tried to take care of that. It is not possible for the central bank to sit in judgement on whether banks and financial institutions are taking the right risks. We can't also wait for the asset bubble to grow and then bust.
What is your view on the economy?
The good news if that GDP growth has been better than expectations. The economy is showing strong signs of competitiveness and production and corporate confidence is warranted.
What is the message to the common man?
The message simply put is this, if I give money it will cost more. Money has become expensive to moderate demand pressures. The stance from here will be to reinforce emphasis on price stability, re-emphasise credit quality and respond swiftly with all possible measures as per evolving global or domestic situations.
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