There's a lurking fear of disequilibrium: Reddy

's discussions with the four wise men in the run up the quarterly review of monetary policy threw up many questions as to why he chose to take a backseat and not react to the current situation by hiking rates.

"We found that the domestic factors are more positive than global uncertainties," said Reddy while unveiling the maiden quarterly review of the annual statement on monetary policy for 2005-06.
Excerpts:

On why RBI has maintained status quo
Industrial growth has been firm; inflation is expected to be moderate, as is the underlying inflationary pressure. It's a balance of convenience... We thought that it would be better to wait for the risks to unfold.

On credit growth.
Credit growth has been beyond expectations. By and large, it has been diversified and healthy.

On interest rates
This has been more or less stable. The government borrowing programme has been more or less in accordance with the schedule.

The management of this required ensuring appropriate liquidity, while keeping the overall interest rate environment conducive to the combined stability of reasonable growth.

On whether there is undue exuberance in the Sensex...
No comment.

On RBI's projections on inflation
As of now, we feel that projections are reasonable and are likely to take place unless unexpected circumstances take shape. The underlying inflation is moderate, but still there are pressures particularly on the oil front.

On demand-led pressure not being as serious
There has been a significant increase in oil prices, and this has had a certain amount of impact on disposable income.

Relative to demand, globally commodity prices are softening. Where liquidity has been managed, demand pressure has not been as severe as we had thought.

On the yuan revaluation
This will be favourable for India as our prices will be more competitive and we can export more especially in the area of textiles. Unwinding of large capital inflows into China could well go to the US or to India.

This will depend upon several factors but clearly India is considered an attractive destination. Capital inflow realignment will be more positive for India.

On higher risk weightage on real estate.
Against the aggregate credit growth, credit to real estate has been growing significantly faster, and we need to take a careful look if banks are taking care with these risks.

There has been a growth of 112 per cent year-on-year. May 2005 figures show an outstanding of over Rs 12,000 crore against May 2004 figure of Rs 5,500 crore.

Activity has jumped up considerably and one needs to be prudent. We have strengthened the reporting mechanism with regards to home loans by increasing the risk weightage (from 50 basis points to 75 basis points).

But we have found that lending to real estate has increased significantly. This measure will help signal to the system at large and to the banks that the risk is more than what they imagined.

On whether credit to real estate sector poses a systemic risk
The Indian situation is very different from Asian countries. The banking sector there and in other developing markets collapsed.

On London bombings
The way the government has responded, we do not expect it to be a spillover of September 11, but much depends upon geo-political issues.

On global uncertainties increasing and triggering a change in the policy stance

We cannot predetermine instruments when there are undetermined outcomes. There is an element of stability, but a lurking fear of disequilibrium.