Reserve Bank of India [Get Quote] Governor D Subbarao describes his first 50 days on Mint Road as 'tough'. He spoke to Business Standard after his first monetary policy statement.

Excerpts:

You said it's been tough for you so far. Is it because of the global problems?

Yes, because of the compelling and the complex challenges that we see on a daily basis.

Should we expect rate-related decisions delinked from the policy during your term also because of the global turmoil which has prompted central banks to respond as and when the need arose?

I have very short experience on this since I have been here for only 50 days. However, central banks around the world, including the Reserve Bank of India, are challenged to respond on a continuous basis.

We cannot wait for taking steps on rates for the policy review, which serves a very useful purpose because it is backed by very established processes.

The documents that we prepare should be helpful in disseminating our views. So, internally the processes and the quarterly policy review serves a very useful purpose.

The stock markets were expecting certain measures and it fell after the policy announcement. Was there a question of not managing expectations?

There was no question of managing expectations of the stock markets. However, to the extent that managing perceptions is part of the monetary policy management, that was done.

But it was completely unrelated to what was happening in the stock markets because economics is not just hardcore macroeconomics of supply and demand. It is also behaviour patterns.

Foundations of the economics are based on rational expectations. So, to the extent that we want to influence behaviour of economics agents, yes, we take that into account.

Companies are still complaining of difficulties in accessing of funds despite your moves. Does the regulator need to do something more to make banks lend money?

To the extent that we have to give confidence to the market players and bankers, we want to give all the confidence that the RBI will respond effectively and swiftly.

We are open to suggestions and feedback, and have taken that into account in our decision making. Beyond that, it is not part of the RBI's mandate to tell banks what they should decide.

Are you seeing some stress in the SME loan portfolio?

In any downturn, it is the weaker part of the system that gets hit first. A very large part of our exports is from the SME sector, and they are going to be hit if there is a recession. It is the duty of the regulator to remind banks to help SMEs to keep the sector going.

What is your assessment of the liquidity requirements of mutual funds and the non-banking finance companies? Also, you have said banks are sound but there is no statement on the health of NBFCs.

We regulate NBFCs and the Securities and Exchange Board of India regulates the MFs. We, Sebi, the other regulators and the government are in constant touch to monitor the developments.

We have come to know that MFs are facing redemption pressures from the corporates, who were pressing for redemption from MFs.

The MFs had some mismatch in meeting those redemption pressures and therefore they were knocking on the doors of the banks where they had borrowed from. So, we took two steps. We have checked with the MFs after that and they said the pressure has softened.

With pressure on MFs softening, pressures on NBFCs will also soften. At the same time, we are watching the situation and if pressure develops we will respond accordingly. The measures taken by us should be able to respond to whatever pressures that NBFCs are facing.

You have taken various measures to release about Rs 1,85,000 crore into the system. Oil and fertiliser bonds will come in and the government will start the tax spending. When will this money come in and how will it affect the system?

We have done the liquidity management after taking into account those numbers.

Even as the RBI has expertise in estimating liquidity requirements, these are challenging times, especially because the constraints are not because of predictable, pre-scheduled developments but because of unpredictable developments from abroad.

So, if developments abroad are seen to have any impact on our domestic markets, we will try to be alive, try to be proactive and address them.

Credit growth is over 29 per cent and you have indicated that you will be comfortable with 20 per cent growth.

But you have also mentioned that there may be some borrowing demand that will shift to the local market given the tight liquidity conditions abroad. So, what will be the comfortable level?

We are not tracking numbers. We are driving the monetary system and numbers are helpful to manage the monetary economic management.

So, credit growth is 29 per cent, our projection is 20 per cent and we have hypothsised on the possible reason for credit growth, which could be substitution effect. So, credit must go for productive purposes, and for whatever activity that aids growth.

On the other hand, credit expansion cannot take place at the cost of credit quality.

Are you seeing signs of deterioration in credit quality?

There are no signs now but the bankers have concerns and we have discussed with them. We have told them to keep an eye on credit quality.

There are questions over the wholesale price index (WPI). Is that the correct set of numbers to use for whatever target you have?

In a document for public dissemination, we cannot enter into a discourse on indicators of inflation. The RBI takes into account not just the WPI figures but also the consumer price index numbers. We take a host of indicators into our calculations.

Every indicator has its own strengths and weaknesses. In a diverse country like India, we just cannot rely on one indicator like developed countries.

Rupee went past 50 against the dollar and despite the RBI's intervention, it is still depreciating. Will you look at other options too, especially because you spoke of using conventional and unconventional measures?

If a member of the public has a suggestion, we will look at it. For monetary management, we will use conventional and unconventional measures.

On the exchange rate, we do not take a view on the level of the exchange rate. We will continue to intervene to manage volatility.

You have talked about special supervision of some banks. What is the idea behind this and will it be all banks?

It will be for select banks. We want to signal that keeping focus on credit quality is very important. If any bank is getting out line, we as the regulator will reserve the privilege and the prerogative of counseling and getting it back into line.

There is a suggestion to allow banks to access funds from the RBI, including from the foreign exchange reserves. Is that possible and will you look at it?

We will look at all the options. If there is a definite proposal, we will look at it. I am not ruling out anything because we have not done it in the past.

But I am also not saying that we are prepared to do everything that is put on the table. We will respond as the situation demands.

• The Monetary and Credit Policy 2008-2009