Subir Gokarn, deputy governor of the Reserve Bank of India, spoke with DNA on the state of monetary affairs. He said he doesn’t see a realty bubble now, but the central bank will consider prudential provisioning in November though it does not rule out an early clampdown if the situation rises.

We are back to, if not above, the 2007 peak in real estate prices. What’s the RBI’s position on realty prices? We haven’t seen you beginning to stamp down using provisioning.

Just two aspects on that one is that from a monetary perspective, the only way to deal with real estate prices is to reign in liquidity, to raise interest rates, to make borrowings more expensive - in short, make money less attractive. We have started doing that.

Now we have broken up the cycle into half-yearly ones where we take monetary and policy-related actions, and the quarterly cycles where we take only monetary actions. So, the provisioning issue would typically be done in either the April or the October-November policy.

Obviously if we feel there is some crisis growing we can act any time. But we assessed the situation and decided that there wasn’t enough evidence of runaway price increases that warranted an out-of-schedule action. If the situation becomes prominent as we prepare for the November 2nd review, we will certainly take this into consideration and as we have done in the past, the issue of prudential regulation may well be the right instrument to do it. But, at this point of time, it is difficult to say it is possible that liquidity constraints may act to moderate realty prices.

We’d like to add a corollary to that question. You have increased policy rates, but banks aren’t likely to move on lending rates soon. For example, take the special home loan schemes that continue. Are banks lending into, or helping build, an asset bubble?
I am not to get into the specifics of sectoral lending. But the broad issue is that when you are in a situation of excess liquidity it’s relatively easy for the banks to continue to lend in the same way.

We are not in that situation any more. It is important to recognise that what you have seen for the last six months - that liquidity scenario has changed. We are watching on how quickly and to what extent banks are going to respond to this. That they will have to respond is quite clear because if they are to hold on to rates in the face of both credit and liquidity demand, they will be squeezing their margins.

We expect the scenario in the second half to be different from what it was in first half because of this transition in liquidity. I cannot answer on asset price bubble. On the mid-quarterly review decision, does it mean faster baby steps? It means two things. One is that if we had to express will towards smaller steps and calibraated actions, the trade-off is that we had to do it more frequently so in that sense we think giving ourselves more flexibilty in acting on schedule rather than having a quarterly action and taking actions mid-cycle. We wanted to give ourselves that flexibility.

We are actually formalising a process that was already exists informally that is, in the middle of the quarterly cycle we do take a review and based on that we took action in March and July. It gives us flexibilty and predictability. This is not to say that every review will result in an action but this will give an opportunity to communicate what we will see in the six-week period.