You are nearing the end of your term. The scenario has changed since you took over. What are the big challenges now?

You know the famous saying, 'the king is dead, long live the king'. In that sense, the RBI is an institution that has a very strong sense of continuity. Most decisions taken in the bank are institutional decisions.

The governor is the public face and he has a unique position. But ultimately there is continuity. Whenever there is a change, it is part of a bigger reform and response to changing conditions.

In that context, I have to be happy about things that I emphasised on like team approach and a committee approach at every level for most of the issues, including an advisory committee on monetary policy. That has an advantage of improving the quality of decision-making.

It provides significant ownership to several departments and each department or person involved in a group is able to take a broader view whenever he or she is looking at the problem in the department later. So every departmental problem is viewed in the context of a group approach.

All this put together has also contributed to professionalism at the bank. It started during C Rangarajan's tenure. We have highly motivated and committed people and our strength is our people. All this is going to have a multiplier effect and RBI as an institution would be doing infinitely better than in the past.

The two big themes in your statement today are inflation and the implications of the financial turmoil in developed countries. Which is a bigger challenge?

We should go back in the past and look at what we thought would be future challenges. If you go back to around the time I took charge, it was thought it was lazy banking, later on it turned out to be greedy banking.

At that point of time, the issue was how to stimulate growth. Who would have thought that the concept of overheating will become relevant to the Indian condition.

At that point of time, who would have thought that people would talk about slowdown when the growth rate dips below 9 per cent? Who would have thought that there would be huge global uncertainties?

In those days, fuel was all that people were looking at. No one would have imagined food would be an internationally sensitive commodity. No one could have thought that there would be the existence of both slowing down of growth and inflationary pressure.

Above all, nobody could have dreamt that the financial markets of the United States, the most advanced financial sector, will crumble. Nor would have anyone thought that some financial institutions would require huge capitalisation. Central bankers will surely need a lot of humility to think of future challenges.

Perhaps, the first round of financial spillover will be confined to the equity markets and I do not see much of a pressure there. Second, the financial sector impact on the real sector will be less than other emerging market economies because our exports are more diversified�The relatively fundamental strengths for the Indian economy are that the saving-investment balance is reasonably balanced, we are generally domestic-demand driven, financial intermediation is not that much, we are still retail bank dominated and not an investment bank dominated economy and our debt markets are not that open.

So, the policy objective should be to sustain growth and 8 per cent growth is sustainable in the medium term. The policy endeavour should be to bring inflation below 5 per cent.

Would it be fair to say that combating inflation is the overriding theme of the policy and growth has been assumed?

Price stability and (managing) inflation expectation have got very high priority. To sustain an 8 per cent-plus growth, you will need price stability and financial stability. There is nothing like a trade off.

Are we seeing some signs of cooling down in the housing market since you have lowered the risk weights on loans above Rs 30 lakh?

Our general stance on provisioning and risk weights continues to be conservative. The increase from Rs 20 lakh to Rs 30 lakh is not any indication that the situation has stabilized. No. It is a concession in view of the large number of people affected. This should be treated as a decision taken in isolation in view of the special circumstances. It is not indicative of a change in our stance with regard to prudential requirements for exposure to housing, real estate or capital markets.

In recent weeks there have been many companies which have reported derivative-related mark-to-market losses. What is your assessment of the situation?

It's a high profile item. It's a new item and is liable to be misunderstood. As far as we are concerned, we have given very clear guidelines. Wherever our guidelines have been followed in letter and in spirit, there is no scope for dispute. If they have not been followed, there is scope for a dispute. These disputes have arisen in some cases.

Banks involved are few and we have had a series of discussions with them. A few corporates have made complaints and these are all under examination. But I would reiterate that there is no systemic risk.

What has triggered the move on systemically important NBFCs?

These are related to the Financial Stability Forum and the recent global financial market developments. One is the off-balance sheet items of banks and we would like to look at it. There are only a few banks which have large exposure to these items.

Similarly, systemically important NBFCs. They undertake many activities, they are growing fast and globally there are concerns about NBFCs. In the US, they had to go for a bailout. Financial stability requires a central bank to look at non-banking entities also