The RBI is sure the liquidity and demand pressures will make bank credit dearer

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and if sectors like real estate witnesses abnormal price hikes, it would use a combination of tools, including provisioning for lending. RBI deputy governor Subir Gokarn speaks to Manju AB and Sneha Shah about the policy action and its implications. Excerpts:

Your rate hikes were meant to harden interest rates, but that does not seem to be happening?

I would challenge that perception. First, we have moved very decisively from a liquidity surplus scenario where transmission is diluted by the excess liquidity to a situation where we have liquidity deficit, we are injecting liquidity into the system. In a liquidity deficit situation, there is much greater pressure on banks to raise lending rates.

Second, credit is starting to accelerate and becoming broad-based. With these two factors, banks will find it very difficult to desist from raising rates. Some bankers said they would not raise rates but that could be a tactical message and many said there would be an upward bias. It is a more appropriate response and that’s where the pressure is heading. If people and industry think rates will rise, it will influence activity as they will start taking decisions.

The RBI has now said that inflation would dip to 6 per cent by year-end. How many rate hikes will it take to reach there?

I would like to answer the question but we cannot make any forward commitments on what we would do in future. Inflation rate is projected on the basis of how certain drivers of growth are playing out. There may be factors that we cannot control so they may not need any policy action. There are others we may be able to influence.

In the macro-economic survey, RBI flagged off an issue about asset prices, especially on housing, rising in a sustained manner and the possibility of spilling over to demand pressures and general price level?

If there is a runaway boom in construction it will have an impact on many commodity prices but many of these are tradable. For example, ste­el. But excess liquidity is one reason why real estate prices are rising. Our earlier response to real estate price rise was through increased provisioning for banks and that remains open as an instrument. We have broken the regulatory actions into half yearly that is April and October policy.

Provision is the first tool that the RBI is going to utilise if you think that the asset prices are rising too high?

If we think it is the appropriate thing to do, the October policy (falling on November 2) gives us the opportunity to do that.

Is that the first tool or the only tool you will use to control asset prices?

There is a combination. The liquidity itself is likely to have an impact because there is no reason that when the liquidity in the system tightens the average rate of lending rates will not go up, including to real estate. Investments into housing will depend on the movements in price.

Is there any proposal from banks to allow them to lend below the base rate?

The base rate by definition is a base rate and one cannot lend below that. If we are talking about concessions on lending base rate, then we may as well go back to the BPLR regime.

Doesn’t this constrain banks from keeping the base rate static?

We will have to look at how the situation plays out. It is new territory for all of us. The transmission, of course, will affect the base rate because banks cannot lend below it and will lose out on business opportunities.

You cannot expect base rates to factor in the rate hike the next day of policy announcement. The issue about transmission comes when things have fallen into place. When we look at transmission, we have to look at the liquidity condition and also look at the way it has to be done.

Is the lag in the growth rates of deposits and credit of the banking system a concern?

It is a concern and we have an explanation for it. It stems from a fact that in a surplus liquidity situation there is lower incentive for banks to mobilise deposits. They don’t want to pay more money to get more depo­sits, so they are willing to let their deposits go down. With liquidity situations having changed and the credit growth picking up, it is unlikely that the banks will be able to support the growth without mobilising the deposits and finding ways to do so.