Y V Reddy, governor, Reserve Bank of India, said growth in agriculture could be better than last year while industry and services could be near the close of last year. Excerpts from Dr Reddy''s address to mediapersons:

"First, when we look at the GDP situation, we basically look forward. We felt that agriculture could be better than last year and industry in general and services could be sort of close to last year. However, it could be slightly moderated compared to last year. That was more or less built-in in our projections.

>In April, when we said 8.5 per cent relative to last year, there is a slight moderation implicit there. That moderation was based on our assumption of some moderation in global output also, apart from rebalancing demand-supply conditions within the economy. These are the two reasons, where compared to last year, why we said this year''s GDP could be closer to 8.5 per cent.

>So, this moderation was expected on the basis of global developments as well as rebalancing domestically between demand and supply. That has happened more or less on expected lines.

>In the next few months, on the basis of current indications, we don''t see any possibility of domestic shocks. However, globally there could be shocks but the assessment is that output growth is not threatened globally. Generally, economic growth according to all projections is likely to be more or less on track.

Therefore, while there could be unexpected global shocks in the financial or contagion, the consensus is that there are higher uncertainties globally. The growth path is likely to be not much different than what it was a few months back. So, we have at the end of it retained the growth projection at 8.5 per cent.

As far as inflation is concerned, the Wholesale Price Index is evolving as per expectations. The Consumer Price Index is slightly elevated, which is a reflection of the food price growth. But hopefully on available indications, some normalcy should be restored.

The oil price pass through has not happened so far and could involve some element of risk. Even after taking into account the moderation in terms of rupees because of the exchange rate variation, some pass through will be required. But that may not be significant enough for us to change our assessment of the outlook for inflation.

>So, we did not want to change anything on the base of domestic considerations. When it comes to the global considerations, global risks arise out of a number of considerations like elevated oil prices, global food price situation, the China factor, in a sense prices in China seem to be hardening, and liquidity.

This liquidity risk arises because the trend in the last few months was in terms of withdrawal of monetary accommodation particularly in view of the impact on inflation expectations, partly due to elevated energy prices, and partly due to food prices.

Globally, because of financial turbulence, significant liquidity has been injected. Therefore, it is quite possible that there will be underlying inflationary pressures from the global situation. However, it is not clear how far it will happen in the next few months.

>At the end of it, we concluded that our own assessment of the inflation outlook for the current fiscal year could be retained as it was originally anticipated. It means that domestic liquidity and oil conditions require greater vigilance. The multiplication of uncertainties globally requires greater vigilance but there is no need to act on any front at this stage, in terms of whether changing the expected GDP and inflation or any of the monetary instruments.

There is an overhang of liquidity and we have to address that issue even after taking into account all the measures like CRR and MSS that we have taken earlier.

There is also another point that we may have to see when we look at inflation on a substantive basis. There is a better demand and supply balance, now supply elasticity is happening, and food credit is coming closer to our expectations, so overall there is a sense of comfort that we have restored the demand-supply balance to a more viable situation compared to one-year or six months back.

>There is only one area which we have to address immediately and that is the overhang of liquidity. Even there we have addressed only a part of the overhang of liquidity. We have left a little part of the liquidity overhang depending on the economic activities that will take place in the next few months, so that is basically the situation.

Then there is the issue of stability. If you recall the first quarter statement, we have flagged financial stability as a new issue and at that point of time also we flagged financial stability issue as something which is arising out of the global situation. Even in earlier statements like in April, we had indicated that there are risks but they are spread. We do not know where they are and all this seems to have come about in a way far more seriously than we ever imagined. At the moment, there is a lot of discussion going on about the global situation.

While there are a lot of uncertainties, we are not very clear how they will get evolved and cleared. A lot of people are assuring that they will get cleared smoothly. If they get cleared smoothly, it is fine. But many people are not convinced that it will get resulted smoothly. Naturally, it is important for us to closely absorb how it is getting resolved.

> Then again the question is do you do something about it. In domestic we are not doing much at all but global shocks are there. It is not appropriate to anticipate some evolution of a problem in this type of uncertainty. The problem was unprecedented, it came from an unprecedented source, and types of measures they have been taken are very unconventional. According to our analysis, the monetary policy is compared to many other emerging market economies and we are less vulnerable.

We thought it is better to wait and see how these global shocks evolve and whether it will come through financial contingent or whether it will come through real sector in financial contingent and through which route it most probably comes through. If it is financial contingent it has to be through the equity and currency route. We have to keep a careful watch but you should be in readiness to take any appropriate action. Corporates, banks, public policy, and RBI have all got to come together because if that is a type of an unanticipated global shock it will have to be everybody that has to take steps."

> Excerpts from the media conference:
Besides these constraints that you talked about, would you expect a 3 per cent target of inflation and above 9 per cent GDP growth to come side by side?
If you go back in history, we were worried when inflation was 8 per cent or 10 per cent. Last few months back when the inflation crossed 6 per cent we were as worried and were able to bring it back. So much again depends on inflation expectations. If you read the survey of last week''s Economist, there is a survey of central bankers. They said the main contribution of central bankers is pegging inflation expectations. That is what we are trying to do.

>I would submit that we may not have inflation targeting but we in RBI try to fix a self impose number. I think has been done at a reasonably convincing manner. First we said we shall try go towards 5 per cent. Everybody should feel that 5 per cent is fine. I am not talking of core as such because ultimately it is the headline that affects us. At 5 per cent we are very much there, on average we are very much there.

It is possible to contain inflation expectations, if there is a responsible fiscal policy. If there is a responsible and appropriate monetary policy, we have proven that it is possible to bring it down. If we succeeded in bringing it down below 5 per cent, we feel that it is possible to take it towards 4-4.5 per cent that I mentioned. Once we reach there, we will brief you whether we will be in a position to go towards 3 per cent on an average. It is not that every year it will be around 3 per cent.

You have now permitted oil companies to hedge forex exposures through OTC derivatives. Could you kindly elaborate on that?
Shyamala Gopinath: Currently they were allowed to hedge to the extent of their imports in international exchanges. What they are now doing now is that in respect of their inventories that they have, if they have a certain price risk on their existing inventory without linking it to imports, they can hedge in international exchanges. It is somewhat like hedging their economic exposures.

Does that mean they can buy commodities in futures?
Shyamala Gopinath: They can buy oil futures in respect of their existing inventory and not for pure speculation at 50 per cent of their existing inventory.

It was reported that RBI had made one suggestion at the SEBI board meeting on October 25 that the P-Note should be banned. If it is correct or in correct I don''t know, but according to media reports one of the suggestions made by RBI was that this SEBI board meeting had outright rejected this suggestion too. How does RBI feel about it? Whether RBI still sticks to its suggestions that PN should be banned and if so, what steps does it propose to take in future to push forward this view?
The whole thing can be summarised in one question and that is what is the status with regard to the PN because what is in the media is what is in the media and what happens in the board is what happens in the board. So, that is not the relevant point. The relevant point is what is RBI''s stand in regard to PN. As far as our stand in regard to PN is concerned, it has been articulated in the official documents.

It has been articulated in speeches and in Ashok Lahiri''s Committee Report. That is where that position remains and that would be the ideal solution. What is to be done and whether it should be done? How non-disruptively it should be done, if it should be done? These are maters of boarder public policy. It is not appropriate for me to comment on that. Our approach and stand with regard to PNs are that they are not desirable. This is the stand that we have taken. Four-years ago, we banned overseas corporate bodies.

>We took a stand at that point of time. Overseas corporate bodies are of suspect origin or at least opaque. If they are opaque in origin, they are not very healthy. Therefore, we don''t want and have stopped it. We continue to have healthy flows on that account. As far as PNs are concerned, it is in that juncture that we made this recommendation and that recommendation is still valid. There is no reason to change our position in that regard.

> In the first six months, bank deposits have grown by 10 per cent whereas credit growth has been very low at 5 per cent. On this backdrop, what would be your suggestion to banks, and also steps required to arrest these capital flows?
From RBI''s point of view, I do not think we should really be advising. We have been advocating that there should be a reasonable balance between deposit and credit growth. Compared to earlier days when credit growth was very fast, a correction has taken place. It is quite possible that in some cases, over correction might have taken place. But we are in a better balance now than some months ago.

>Some nuances or adjustment may be needed with regard to some banks'' balance sheets. But from a systemic point of view, there is a reasonable balance now. It is definitely better than what it was about seven-and-a-half years ago or something like that, when I think credit deposit ratio was 110-120 per cent.

> Do you think there are more steps required to arrest capital flows?
Appropriately active capital account management is necessary at this juncture.

Do you see corporate developments in the stock markets?
We do not take a view on asset prices. However, you will find a reference certainly in the monetary policy to the fact that asset prices, in particular equity and real estate, have been escalating in spite of some moderation in real estate. This is partly attributable to the nature of capital flows and that certainly is a matter of concern.

> Inflation measures only the price of goods and particularly consumer price index of goods and services. So, if you look at only WPI and CPI, then we may not get a full picture. Though we may not be able to measure, we have to take into account that movement in asset prices as a matter of relevance. It has some implications to monetary management, particularly in the context of stability. We have got again two aspects, wealth and income effects, and second is the stability part. What we have been trying to do is ensure that banks'' balance sheets are not overexposed to such assets.

>International experience over the last two years has shown that a benign neglect of banks'' exposures to assets has resulted in a problem. If we had been sensitive to this aspect, and in a somewhat unconventional way we have been alert, we have alerted the banks.

>Second, is off balance sheet items and the exposure to non-banking financial companies. We felt that banks are so critical to the system that their off balance sheet relations to non-banking financial companies should also be subjected to a careful scrutiny of the supervisor and appropriate prudential guidance. We have done that. The type of backlash is due to off balance sheet items and changes in the asset prices. We have been able to successfully moderate and add to the stability.