in trying to finance such a large cad, we are exposing the economy to the risk of sudden stop and exit of capital flows. this will be the case to the extent capital flows in in pursuit of short - term profits. should the risk of capital exit materialize, the exchange rate will become volatile causing knock - on macroeconomic disruptions. monetary easing in the context of a large cad 53. while the external sector vulnerability is a cause for concern on a number of counts as i indicated above, it also poses a special challenge for calibrating the monetary policy stance. 54. in our quarterly policy review at the end of january this year, the reserve bank cut the benchmark repo rate by 25 bps in response to the growth - inflation dynamics that i outlined earlier. several analysts and commentators have questioned the wisdom and logic of monetary easing at a time when the cad is rising. there are two elements to this argument : ( i ) an interest rate cut raises aggregate demand, and hence demand for imports, and will aggravate an already elevated cad ; and ( ii ) an interest rate cut will narrow the interest differential between india and the advanced economies which are the source of capital, and could potentially lead to capital exit. 55. let me respond to both these strands of criticism : 56. the risk of the cad widening further because of the stimulus offered by the rate cut is much less than apprehended for a host of reasons. first, when growth is sluggish as is the case now, the rate cut is unlikely to translate into import demand. second, the rate cut was a response to softening inflation. lower inflation will improve the competitiveness of our exports. third, the rate cut was effected during a phase of easing commodity prices – particularly of oil – which will reduce the pressure on the cad. finally, empirical evidence bis central bankers ’ speeches shows that in emerging economies such as india, import demand is less a function of lower interest rate than of increased income. in other words, the marginal propensity to import by borrowing money is small. 57. on the other criticism about the impact of capital flows required to finance the cad, it must be noted that interest rate differential is only one of the several push and pull factors that influence capital flows. moreover, debt and equity flows have traditionally responded differently to a rate cut. while debt flows may be more sensitive to a narrowing of the interest rate differential, equity flows may actually increase because they see

lending. third, as a research institution, the federal reserve conducts and publishes analyses of the price data, and it encourages research by other parties as well. fourth, the federal reserve supports efforts by other organizations to use the hmda data to identify financial education and community development needs. the federal reserve also supports their efforts to respond to those needs. the board ’ s decision to collect price information as i have said, it is a board regulation, adopted under authority of hmda, that requires lenders to disclose loan - price data. i will now provide some background on the board ’ s decision to amend that regulation to include price data. advances in information processing technology have expanded access to credit and homeownership opportunities for consumers. in the past, individuals seeking credit to purchase a home, or seeking to borrow for some other reason, either did or did not meet the specific underwriting criteria for a particular loan product ; if they did, everyone paid about the same price for that product. today, in part because of advances in credit scoring and underwriting technology, lenders can price loans according to risk, charging different borrowers different prices on the basis of a borrower ’ s estimated creditworthiness. the enhanced ability of lenders to assess credit risk gave rise to a segment of the mortgage market often referred to as subprime lending. in the subprime market, higher - risk borrowers pay higher prices. subprime lending has grown rapidly, from less than 5 percent of all mortgage lending in 1994 to an estimated 20 percent in 2005, or over $ 600 billion. the wider range of loan pricing available in the subprime market helped to expand consumers ’ homeownership opportunities and to increase their access to home equity. but this same price variability has raised concerns about unequal treatment of borrowers. it also has raised concerns about whether certain loan terms and lending practices are appropriate, whether consumers have the ability and knowledge to shop for the most beneficial loan terms, and whether the subprime market is sufficiently competitive. the board responded to these concerns by amending regulation c, the regulation that implements hmda, to expand the available data on higher - priced lending. the data released by the ffiec in september 2005, which covered lending activity in 2004, contained the first loan - level information on loan pricing ever available to the general public. the data contain price information for loans whose prices exceeded thresholds set by the board. the thresholds were selected to target