'Govt should take steps to rein in asset prices'

The government needs to back up the Reserve Bank of India's (RBI) efforts at dealing with high money supply and also for calibrated deceleration in credit growth, said R H Patil, a member of the RBI's technical advisory committee on monetary policy.

Patil said the building up of "asset price bubble" in the real estate and stock markets was a disturbing situation and the government needs to take steps to reform rules and regulations for realty investments and foreign institutional investments through the participatory notes to avoid any damage to the financial system.

The high asset prices are definite signs of overheating, he stressed.

The RBI has taken gradual steps to deal with growing money supply, more an outcome of the huge portfolio investments, and also for slowing down the unprecedented high growth in credit.

The government also needs to send signals about concerns being expressed by the central bank, he said.

The growth in money supply (M3) is currently 19.4 per cent, much above the RBI target of 15.0 per cent for 2006-07. In normal circumstances, the policy preference would be for maintaining a lower order of money supply growth in 2006-07, according to the RBI.

"While there is much talk about the land bank (land available) for construction, the rules and regulations severely limit the supply of space for real estate activity. As a consequence, the prices are artificially ruling high, creating impression that that Indian market for real estate is growing high," he said.

Similarly there are concerns about the transparency of participatory notes through which overseas funds flow into the markets. Real estate firms are also tapping the primary market to raise funds at very high premiums, he pointed out.

On banks finding resources to fund to the runaway growth in non-food credit, Patil said all money raised through deposits is being used for lending for the last two years.

Banks have also liquidated their excess SLR portfolios to release resources. The level of excess SLR securities portfolio would come down further. At the end of September 2006, SLR portfolio of the banking system was 29 per cent of aggregate deposits.

Non-food credit continues to grow at over 30 per cent for the third year in a row. RBI wants calibrated deceleration in credit growth to around 20 per cent from the current increase of around 30 per cent.