There’s a talk of reversal of the current easy monetary policy. What is the right time to do it? Do you expect any hike in CRR or repo/reverse repo rates in the next RBI policy which is due in October?

It is difficult to pin down when the right time is to withdraw the liquidity. I am not sure whether we should be even talking about an exit strategy now. Its seems too early. At present credit growth is pathetically low and there is little sign of any decisive break towards sustainable recovery. A 6 per cent growth is not a recovery given the experience of the last 5 years. Monetary conditions need to be kept easy as long as we don't see decisive signs of turnaround in the economy or in credit growth. Fears of the liquidity sparking inflationary expectations or asset price bubbles are overdone and I can't see India's bankers aiding and abetting this process, given their natural conservative bent.

So I don't see any tightening move by the RBI in October. Any such move would seriously jeopardize the incipient recovery.

Do you see interest rates hardening and credit offtake improving this year? Do you think high govt borrowings and fiscal deficit are putting severe pressure on rates?

Credit growth in the first half of this year was 3 per cent on an annualised basis. Credit growth should pick up from now, but nothing that should seriously harden interest rates. In fact even a 15-20 per cent annualised credit growth in the second half of the year will not reduce the excess liquidity significantly. I don’t think we can have our cake and eat it to. We can't ask the government to step in with additional demand to prop up the economy and then say rates are under pressure because of that. Suppose the government did not step up its stimulus, then credit growth would probably have been negative, GDP growth much lower, excess liquidity even higher, but interest rates would have been much lower. So yes higher government borrowing has raised interest rates, but it is a red herring in the sense that reduced government spending would have made the situation worse not better.

... contd.