• The Monetary and Credit Policy 2008-2009

As India's growth is mainly driven by domestic demand and consumption, the country would be less affected by the global financial turmoil but it would not go completely unscathed, Subbarao said.

Justifying RBI's cautious credit policy announced on Friday, Subbarao said that as a central bank, it had to balance price and financial stability with growth as inflation, though declining, continued to be a matter of concern.

Between October 6-20, the RBI has already injected Rs 1,85,000 crore (Rs 1,850 billion) liquidity into the system and "the one per cent repo rate cut was aimed at getting the financial markets going and giving them confidence," he said.

If the situation warranted, RBI would not hesitate to either infuse or withdraw liquidity from the system, he said, adding that at the same time the central bank wanted banks to focus on credit quality and ensure flow to productive and vulnerable sectors. 

Subbarao said that bankers have a 'challenging task' and his message to bankers yesterday was that they should keep credit flowing to productive and vulnerable sectors.

"They must also keep an eye on credit quality which is important," he said.

"If there are liquidity constraints or anything needed to be done within RBI's mandate, we will do it," he said, adding that the RBI would act swiftly and pro-actively to evolving situations.

Asked what would be his message to the market which crashed on Friday, Subbarao said that the RBI was not in the business of reacting to equity markets.

"We are the monetary authority, we give monetary policy signals and hope that they get appropriate signals," he said.

Turning to inflation, the RBI Governor said, "In mathematical terms it was coming down and should be at around seven per cent by end-March." 

But inflation continued to be a matter of concern as RBI forecast is based on not merely the wholesale price index but also other data.

"The RBI makes a deeper study and if one analyses the consumer price index, the CPI for agricultural and rural labour was up by 11 per cent and that for industry was up nine per cent," he said.

Oil prices, though declining, still continued to be volatile and kharif output, though promising, is forecast lower, he said, adding that "a weakening rupee also adds to inflationary pressures."

The RBI has announced its monetary policy in the light of these concerns and balanced the need for financial and price stability while propping up sagging growth, he said.

Subbarao did not subscribe to the view that the Reserve Bank is using less of the reverse repo as an instrument.

"It (reverse repo) is an active variable and RBI will use it as a variable," he said adding presently, "we have decided to leave it at six per cent".

He said the monetary measures taken in recent times have already begun reaping results, with call money rates now coming close to reverse repo rate, while the yield on the 10-year G-Sec has also started coming down, from 8.3 per cent to 7.58 per cent.

"These are signs of the liquidity situation easing," he said.

On RBI's intervention in the spot or forward markets, Subbarao said he cannot discuss it publicly but the apex bank had a policy and intervened in the markets as and when necessary.

The RBI was 'sensitive' to the dollar liquidity issue, he said, adding that the central bank has taken a number of steps including easing of external commercial borrowing norms, raising NRI deposit rates and allowing banks to borrow from their overseas subsidiaries and branches.

"If anything more needs to be done, we will do it," he said.

Replying to a question on ways and means advances limit, he said it was temporary and had no bearing on government borrowing.

On credit growth, which has exceeded the projection of 20 per cent at 29 per cent, Subbarao said, "Our call was to work with the 20 per cent projection credit growth."

Up to October 10, however, it had exceeded projections and stood at 29 per cent.

"We are not chasing numbers for their own sake... We want to make sure that credit growth goes to productive sectors and... helps in economic growth."

'Centre-RBI relations healthy'

The Reserve Bank on Saturday set at rest speculation that the Centre was interfering in formulation of monetary policies, saying the relationship was 'healthy' between the two.

RBI is an independent and autonomous body and consulted the government and other stakeholders while formulating monetary policies but did not necessarily follow what the government said, the apex bank's Governor told reporters.

"As a former civil servant, I know the RBI has consulted with the government but does not necessarily follow (what the government says)," Subbarao said, adding 'as a monetary policy institution, we (the RBI) consult the government and other stakeholders and that is the convention, no more, no less.'

Terming the present difficult global situation as 'high-profile with implications on so many things and making front-page news', Subbarao said 'these are extraordinary times and the government and RBI were grappling with the same challenges.'

Both fiscal and monetary policies, even if formulated independently, have to be co-ordinated, he said.

• 'Can't wait for review to decide rates'