'Uncertainties are highly uncertain'

Q&A: Y V Reddy

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Are you surprised that the mid-term review has been described as more hawkish than expected?

There is an overhang of liquidity of about Rs 30,000 crore. What do we do with that? And even then, I think we suck out only Rs 16,000 crore, which is only part of the overhang of liquidity.

This is on top of the Rs 200,000 crore of market stabilisation schemes. I don't know whether to call it hawkish, dovish or neutral. No action is being taken now, except to partly take care of the overhang of liquidity.

Isn't complete sterilisation of both forex inflows and the resultant liquidity impossible?

We are talking of what is called impossible trinity (fixed exchange rate, open capital account and independent monetary policy).

The public policy has decided that it has to be managed and, therefore, we are managing it. And we are managing together as part of public policy "" the government, the RBI and various agencies are working together. And I think if you take the various policy outcomes in the past 6-10 years, they have been very favourable.

President (Ronald) Reagan in one of his speeches in Washington once said ... "when something succeeds in real life, the economists will start wondering whether it will succeed in theory."

At some stage you can have a different policy framework, but at the moment there is a given law, there is a given responsibility and there is a given policy framework that seems to be working pretty well for the country.

Will the use of longer-term reverse repo or variable rate auctions happen soon?

All options have been kept open.

The mid-term review has focused more on global uncertainties ...

At the moment, the overall domestic conditions are reasonably stable and reasonably benign. It is an unprecedented situation globally and, I think, there are three parts to it.

It explains how the situation is different from the earlier times, the possible unfolding of events of the current crisis and how it may affect India in different ways. It is the framework which we are sharing with the market and the analysts and we hope to get some analysis.

How uncertain are these factors?

I think from whatever I could see and I could say, the uncertainties are highly uncertain.

Will the pass-through of oil price increases not be a big risk to inflation?

I think we must make a distinction between the pass-through of the oil price increase that has already happened and any increase that may happen. We do not know how the increase in prices that have already happened will be passed.

It will take place "" in two months, three months, nine months "" unless there is a reversal in oil prices. And that reversal does not seem likely. The timing may not be very clear but it will happen.

Therefore, we are not taking that into account in our inflation outlook. And, as I try to explain, if there is a pass-through, inflation would be closer to 5 per cent and if the pass-through does not happen, the number may appear a little less than 5 per cent.