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Reserve Bank can't prop up investment demand: Reddy

BS Banking Bureau

Reserve Bank of India deputy governor YV Reddy does not see much scope in lowering interest rates through a bank rate cut. In an exclusive interview with Business Standard, Reddy said: "Let us be clear that there is not much scope for brining down the level of interest rates through an isolated signal like the bank rate. "

In fact, casting doubts on the effectiveness of interest rate as a policy instrument, Reddy said that it is far from being a effective instrument.

Reddy does not see the relevance of the successive Fed rate cuts in the Indian context. Making it clear that RBI will not be influenced by Alan Greenspan's policy to spur growth by cutting rates, Reddy said: "Basically the Fed rate cut doesn't have as much relevance to us as it has in the case of many other countries. There is some linkage, particularly in the context of the external commercial borrowings but it is certainly not an overwhelmingly important factor."

The deputy governor also made it clear that the RBI has done whatever is possible, within the current framework, to revive demand. He said, "We have done our bit to give a fillip to investment demand and Governor Jalan has has recently explained the interest rate stance."

Saying that the central bank is not responsible for the slack credit demand, Reddy emphasised that "if impression has been given that the interest rates will keep going down and down in order to just revive demand that is a wrong signal". According to him, lower interest rates cannot be the panacea for all ills in the economy.

"I don't think we are looking at interest rates to solve all our problems. The way we are going, the effort is to make the interest rate regime more flexible and responsive to the economic fundamentals and make it a better instrument. Today it is far from that," he said.

Stating that monetary policy does not determine the investment demand, Reddy said the effectiveness of the monetary policy entirely depends on how well the fiscal policy is managed. " Monetary policy is operating on a given fiscal determinant/platform. And within that framework, the monetary policy can deliver and nothing more or nothing less....".

He was, however, quick to add that in the current Indian context a monetary policy independent of the fiscal framework is "totally inappropriate".

Reiterating the RBI stance, Reddy has called for more operational freedom for monetary policy. He also feels the central bank should cease to be the debt manager of the government.

Gilts prices slump

The government securities market crashed in late evening trade today reacting to Reserve Bank of India deputy governor YV Reddy's comment that there is not much scope for a bank rate cut. The market turned volatile after an interview was put up at the Business Standard website in the evening.

The prices of government securities fell by Rs 2-2.50 medium to long end of the market. The yield of 10-year paper rose to 9.81 per cent from 9.40 per cent in the afternoon. Yields of five-year paper increased to 8.30 per cent from 8.15 per cent. Money market dealers stayed till late in the evening to offload their portfolio of government securities.

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