If it ain't broke, why fix it?

The considerations in favour of status quo are evenly matched by those for change in stance, but the balance of convenience at this juncture lies in continuing with status quo while monitoring the unfolding constellation of uncertainties, especially in the global arena", the Reserve Bank of India's (RBI's) summary of its monetary stance in a sense underlines the regulator's approach, right from the time Governor Yaga Venugopal Reddy presented his first credit policy in November 2003.

Don't rock the boat, iron out glitches to smoothen credit flow, and send out gentle signals to nip incipient trouble areas in the bud "" for the second time, Reddy increased risk weights for sectors where he felt a bubble was developing, while not raising interest rates for the economy as a whole.

In his first credit policy announcement in November 2003, Reddy refrained from tinkering with rates and liquidity. Instead, the spotlight was on the need to ensure adequate credit flows to all sectors at the right price. In effect, the focus of the policy shifted from the creation and management of liquidity to the delivery of credit.

In between "" in May and October 2004 and April 2005 "" Reddy meticulously crafted a new architecture by addressing the structural issues and ironing out the technical glitches of the financial system. The phenomenal credit growth, reported in the latest quarterly review was possible because of his passion for the three Cs he outlined in his first policy "" credit delivery, credit culture and credit pricing.

This time around, despite the unprecedented credit growth, the reason why Reddy did not need to hike interest rates was the timely action he'd taken earlier to manage inflationary expectations "" he had hiked short-term (read: reverse repo) rates twice as well as the cash reserve ratio (CRR) over the past 10 months.

In more ways than one, all Reddy policies are inter-linked with an over-arching passion for status quo. He knows well that the financial markets hate instability. His first policy in November 2003 could well have been scripted by his predecessor Bimal Jalan as the focus was on familiar issues like rationalisation of banks' prime lending rates, phasing out of non-banking players from the overnight call money market and the negotiated dealing system for government securities.

His next policy in May 2004 also harped on the stability factor. When the nature of the fiscal deficit was unknown (as there was no budget with no government in power), no monetary policy document could be dramatic in content.

So, Reddy focussed on giving freedom to banks in terms of their exposure to individual borrowers and corporate groups and acknowledged the fact that the Indian banking system did not always need hand-holding by the regulator.

In October last year, Reddy effected the first dose of a quarter percentage point reverse repo rate hike to douse inflationary expectations, but did not press the alarm bell. In that policy, Reddy raised the risk weight on housing loans from 50 per cent to 75 per cent, and from 100 to 125 per cent on consumer credit including personal loans and credit cards. He did not want to encourage an asset bubble.

After a gap of eight months, he took the next logical step in the quarterly review by raising the risk weightage on banks' exposure to the capital market as well as the real estate sector by 25 percentage points to 125 per cent. This is no surprise as the commercial banks have possibly been taking more than necessary risks in raising exposure to this sector.

And while he announced the second dose of the reverse repo hike in April this year, he kept the bank rate untouched (the bank rate was the main signalling rate under his predecessor Bimal Jalan). As a result of this, while there was temporary volatility in the bond market with the yield on benchmark 10 year paper crossing 7 per cent, the credit market was left by and large unaffected.

Indeed, there are many risk factors on the macro-economic front like the high and volatile international prices of oil, the incomplete pass-through of oil prices domestically, rising US rates, a liquidity overhang, very high credit growth, sustained industrial growth and possible capacity pressures, rise in trade deficit and infrastructural constraints.

The list goes on. But, as Reddy has no doubt argued, the global oil price hike has not been passed on to the economy so far, the overhang of liquidity has been reduced with the increase in the absorptive capacity of the economy, money supply growth is within the projected trajectory, credit flow is getting broad-based, industrial growth has revived and there is a visible pick up in investment demand.

In short, when the party's not getting out of hand, why spoil it?