subir gokarn : interview with business standard interview with dr subir gokarn, deputy governor of the reserve bank of india, conducted by the business standard, mumbai, 1 february 2010. * * * friday ’ s was the first monetary policy that reserve bank of india deputy governor subir gokarn has been involved with directly, and the experience has been rewarding. “ the rigour of the process was a revelation, ” one of the youngest deputy governors that the central bank has had says. in his first interview to a newspaper after taking charge two months earlier, gokarn, 50, explains the rationale for the measures. edited excerpts : the rbi governor compared himself with abhimanyu in the mahabharata. how difficult is the situation? the context for that is that it was very easy to do what was done in october 2008 onwards. once the severity of the crisis was recognised, a lot of actions were taken in a very short period of time which completely changed the balance of the policy stance. obviously, there is a need to correct it now and to take it to normalcy. so, when you start moving towards that, even if it is a correct thing to do, it can be potentially disruptive. returning from the situation, the sequence, and pacing the activity is going to be critical. going forward, that ’ s really the challenge. rbi expects the government to do quite a few things. the policy statement also makes a lot of assumptions. what happens if these are not met? the commitment made in the last budget was that the fiscal deficit as a percentage of gdp will be 5. 5 per cent in 2010 – 11. there is no basis for us to assume that it will be anything different. so, our estimate of the funding requirement in order to support the government borrowing programme, as well as the growing demand for credit from the private sector, has been factored into our decision while increasing the cash reserve ratio by 75 basis points. the policies we make today are because of what we believe the macroeconomic environment will be over the next few months. so, we have to assume certain things on growth, inflation, liquidity, fiscal deficit, market borrowings and capital inflows. in that assessment, we have to allow, and have indeed done so, for some cushion if some of these assumptions go wrong. capital flows are a worry. have you factored in the possibility of intervening in the market and using instruments to

, this suggests a narrow set of drivers and there are risks inherent in that. we do not overplay the risks, but we cannot ignore these either. it is quite likely that our stance would have been different if we had much greater comfort in the broadbasing of the recovery. rbi has made money more expensive without hiking rates. was the central bank a bit too hawkish? the objective ( of the 75 basis point crr hike ) was to extract excess liquidity from the system. that ’ s because we are looking at a situation where food inflation is clearly a problem. as the recovery gains momentum, which is what we expect, the risks of food inflation spilling over into more generalised inflationary pressures increase. our approach to mitigating that risk is by anchoring inflationary expectations, to which excess liquidity contributes. when we looked at an increase of 50 basis points as the possible starting point, we felt it would not be enough. we felt that a 75 - basis point hike would provide a better balance between anchoring inflationary expectations and sustaining the momentum of the recovery. the goal was certainly not to surprise the market. what is rbi ’ s assessment on credit flow? if the overall liquidity for the last two months is still around rs 100, 000 – 110, 000 crore, then the credit growth that banks have been talking about is not there. the projection for credit growth is a function of a number of things. some sectors are doing better than the others, but overall demand for credit is still relatively sluggish. corporates are using alternate sources of funding and internal accruals. so, when growth picks up, as we expect in 2010 – 11, it will have some impact on credit growth. we will have some indication of the borrowing schedule after the budget and we will ensure the liquidity scenario does not become destabilising for growth. you have talked about real estate prices. how big is the threat to the banking system and was there some talk of putting some checks on lending? we don ’ t have a view on what real estate prices should be. the concern is driven by the degree of exposure the financial sector has to the sector and whether that exposure is a source of risk that could destabilise the system. if we feel the exposure is becoming threatening, we will take measures. we don ’ t want to do anything directly to real estate. we don ’ t want to tell banks not to lend to real estate,