Speaking exclusively to CNBC-TV18, Y V Reddy, Governor of RBI said that the global exit from sub-prime crisis is not clear. He felt that there is a greater appreciation of capital flows problem. "We need to let market know that we have the capital act management option though more convincing action on that is needed" he said.

>On the rupee, Reddy had a view that rising currency affects different interests differently and one must take into account the employment and output effect of exchange rate. He added that there is not enough flexibility in real economy to adjust to exchange rate volatility.

>Excerpts:
Where do you see interest rates? Do you see any signs at all that there could be some kind of softening? After all you seemed very satisfied with the victory over inflation. And then of course there is this interest rate differential argument also. In your worldview where is interest rates, has it peaked off or still peaking?
In a philosophical sense, it is said that the governor of central bank'' s nightmare is low growth and high inflation. And for a central bank Governor, the dream is high growth and low inflation.

You have a dream job?
In other words, things are looking reasonably good. So, in that sense, the growth is a little more on solid foundations now as there is a better demand-supply balance. So, I think it is good to see that it continues like that.

Now, as far as inflation is concerned, it is not correct to say that you are very comfortable. There is no discomfort in the existing situation, though there is a slight concern both on the oil front, inadequate pass through and persisting consumer price.

>Therefore, there is a need to watch inflation, even at a global level. So, therefore it would be appropriate to say that the level of lack of discomfort is enough to ensure that we wait and see rather than act.

>Do you think that now there is sufficient appreciation of the problem of capital flows? Sometime back it looked like Reserve Bank was the only one who was battling it?
Yes, we have been early and rather active in articulating this problem. There is a better recognition in our country but to be fair in many other countries, the realisation has been somewhat late. But now many countries in the last few months are trying to manage capital flows, liquidity and this seems to have become quite a bit of a challenge. In some senses, this is a process of rebalancing in terms of macro imbalances as well as the currency on the one hand and the re-pricing of risks by the financial markets.

>So it''s a historic process, which is going through and we are only one part of the global issue. In other words the problem of capital flows that we are facing is not unique to India. Many countries are facing it whether it is Australia, New Zealand, Korea or China and each is trying to manage it in its own way.

>When you raise the issue of capital flows and the problems they are creating it was perhaps hinted in April policy. It was raised in a big way in April but the first of ECB controls came only in late July or August, whereas the convertible preferential controls and PN controls came later. Do you think that now at least that convincing is not needed and most of the policy makers are on the same page?

>In a dynamic situation like growth versus inflation trade off, there are different perceptions and that is the beauty of democracy. It has worked well as far as our country is concerned and whatever the dynamics, policy outcomes have been generally good. Growth has been accelerating coupled with price stability as well as financial stability.

>My stand has been that you must keep the option and you must tell the market that I am keeping the option so that they also are assured of the instruments as well as the stability. But I was perhaps in a minority then but overall over a period now there is greater realisation particularly among the emerging market economies that some sort off management of capital account is necessary.

>Are you happy with the impact the external commercial borrowing controls and the preference share controls have achieved? Have they served the purpose?
I think control is not a correct word. It is management. Since we are interacting with the markets, therefore control is not an appropriate word.

In a world where there is an increase in trade integration, India has a lot of trade integration and integration with current account. So, it is always possible for capital account transactions to take place in the guise of current account transactions through trade. So, invariably as there is a greater global trade and current account integration and by definition, capital account management becomes more difficult.

Another aspect that you have to see is that whenever you want to assess the effectiveness of a particular instrument used for capital control, we have to ask two or three questions. First is, if we didn''t do that, what would have been the position? Would it have been worse? So, effectiveness has to be in a way judged counterfactual.

>Second is, have you at least given a signal, though today it may not be effective, you might be giving a signal to the markets, that if necessary, I may intensify the control. So, you are establishing the principle that we have controlled.

And third is, how far you are able to show your determination to the financial markets to an extent that we are changing their expectations. So, this is a continuous dynamic thing here.

>And that you think has been served by the control?
But that is something, which is very difficult to be judgmental about. But we have to see as we move along.

Under the current circumstances, given the current flows of capital on both sides, do you think that enough has been done or do you think that it is not just the option but the option has to be exercised to put more controls?
As I said, the basic issue that we have been emphasising even in this policy is that active capital account management is required. Now, how active, how appropriate, what are the costs, what are the perceptions is really a broader issue and it would be inappropriate for me to make a judgment.

>But certainly, we reiterate that more convincingly active capital account management, and greater impact on the financial markets expectations would be necessary.

>Are you worried that this very rapid movement of the rupee is endangering either social peace or triggering social unrest or for that matter endangering the macro economic growth path itself? It has not become that serious an issue?
It is very difficult to say. But it is definitely a matter of debate in the overall public policy context and I think we are closely monitoring the developments in this regard.

Exporters say that 8 million jobs have been lost because of the rally in the rupee in 2007 itself. Do you think the threat is much wider because you are not even counting the number of jobs that may have been lost because of cheaper import challenging domestic industry?
It will be inappropriate for me to make some general observations in the absence of data. But yes, very often, different interests are affected differently. When the rupee has appreciated, you will find exporters definitely complaining, whereas the importers of intermediate goods may feel more comfortable.

>If you have got lots of investments going around and if you are importing capital equipment, you are very comfortable with appreciated rupee. If you have a balance sheet with significant exposure to foreign currency, then appreciated rupee gives you windfall gains. If you have for lots of ECBs, which many of our corporates have, then the servicing becomes cheaper. So the affect is different to different interest.

In the absence of that, it is not proper to assert any particular position. One has to recognise the employment output effects of the exchange rate. Exchange rate cannot be viewed entirely as something, while from our point of view, as far as our management is concerned, it has to be market determine and that is how it is happening.

But the problem arises in terms of volatility. So when there is volatility in the financial sector, the other end of self-correcting mechanism at this juncture definitely for emerging market economy are less. There are sufficient flexibilities in the real sector to be able to catch up. So there is on a purely judgmental basis, one can say that real sector flexibilities are not that high and the financial and fiscal sectors are certainly not that developed in this country.

Therefore, the movements in exchange rates could have serious implications. But at this stage definitely this is a matter, which is appropriately debated upon and it is debated upon all over the world. Even New Zealand, which has very rigid formula had to take cognizance of this issue, I think Australia has expressed something. I think it is a global concerned.

Even from the time of Dr Jalan the RBI''s stance has been that it only tries to smooth the volatility in the rupee… the pace of movement and not the direction of movement. But in doing so, doesn''t it bail out people, in a sense that people are able to take a directional call and make money on it, and in a sense it also makes hedging pretty uncalled for?
On that, if you just see the history of over the last four-five years, actually till about one and a half to two years ago, there was a two-way movement.

The two-way has been very smoothed out. Pretty safe for a person who is playing the markets?
No, it has depreciated. But in general, I would say there was a two-way movement as far as the rupee is concerned till about one and a half years back. The global situation has become very different. The global excess liquidity has become one-way. When the whole global excess liquidity has become one-way, many of the currencies are forced to move in one-way and the global imbalances were also getting expressed like that.

>Calling the direction is not difficult?
Yes. So, again in that situation when all the forces are going in one direction what is the way in which you reduce the volatility? You reduce it by attempting to moderate the rapidity at which it is moving in one direction.

Enough has been said about recovery agents, but as a banking regulator, it is the RBI''s responsibility to see that loans taken are returned. Otherwise, there is no banking system. So, is it not becoming a worry that openly attacking recovery agents could weaken that fibre?
Again, it is inappropriate to say that the banking regulators'' responsibility is to particularly ensure that banks get the money back. Actually, the responsibility is to make sure that the banks lend responsibly, get the money back responsibly and the terms are reasonable.

>More importantly, remember that the banks are licensed to accept non-collateralised deposits, which are highly leveraged. It is a license that has been given and that license means that the people have faith in a bank.

That is why banks get special exemption from acts like Usurious Act, which are in terms of protection to the customer. So, there is a moral responsibility on the banking regulator to ensure that there is a symmetrical treatment between the lender and the borrower.

>The recovery agent is a new phenomenon. Essentially, recovery agent is an agent and the principal has to be held responsible for whatever the agent does. What all we are saying is that we are indulging in things that are not civilised and then it is inappropriate.

More importantly, we are really trying to help the banks. When the recovery agent indulges in excess, it becomes a crime and when it becomes a crime, it hurts the banking system more.

>So, we are urging banks to make sure that they do not reach a situation where their recovery agents are attributed with crime. In order to do that, even as we get the complaint, we are encouraging banks to make sure that they do not have it in their systems.

>Secondly, we are saying, "if you are not able to convincingly have responsible recovery agents, you should not have recovery agents and do it yourself." That is a fair proposition, I hope.

>You have often pulled up banks when they treat depositors asymmetrically and give lower rates discounted rates to new borrowers especially in home loans disguised as a festival discount but don''t pass on that advantage to existing borrowers. If your cost is cheaper it should be available to everyone?
Honestly, I don''t know this technicality, to be very frank, but as a general proposition what I would say is that it is not the intention to introduce any administrate any interest rate system at all. Definitely banks will have to assess the risk involved though I don''t know the exact detail; obviously there must have been some practice.

>In case of a borrowing rate, it is a rampant practice that a new borrower is enticed with a lower interest rate while the existing borrowers are just dumped and they have to pay the same?
That also has been brought to my attention. But whether it is fixed rate or a floating rate, they should be transparent and should have a fair pricing. Discrimination means it should be justifiable discrimination.

>You think it is a justifiable discrimination?
We cannot go into the micro but it has come to our notice the way in which the so-called formal contract is being implemented. It is being implemented asymmetrically that when the rates in the systems interest rates increase, they are increasing.

>But when the system''s rates come down, they are not reducing. So far we have been explaining them and we have got the fair price quote. Now we are examining a system where it will be the responsibility of the lender if the borrower asks for an explanation as to why there has been increase in the interest rate.

>They should be able to explain to them and if they are dissatisfied, they should have an opportunity to question. In some countries there is lenders liability legislation but in our country, there is no such thing, so we are trying to introduce lenders liability through regulation. So the problem is sometimes they feel that regulator is being intrusive but I have to fill up a gap in the legislation. Ideal situation will be if there is legislation, which insists on the liability of all lenders whether it is banks or non-banks, then my problem is partly solved.