Excerpts from CNBC-TV18's exclusive interview with Nilesh Shah:

Q: How would you read this policy?

A: It just proves that the central bank is not a Dracula, which wants to suck out liquidity from the system at the cost of growth. This is a dream policy, where the apex bank is saying that money will be available for productive usages and that growth will not be compromised at the cost of inflation, at the same time trying to balance growth and inflation.

It is taking various steps which is broadening India's financial system. It is expanding Indian financial system by allowing individuals to play the foreign exchange market. So it is taking small but definitive steps to deepen the Indian financial system.

Q: What signals would you pick up on the interest rate front from this policy? Would you say it is a pause or are there any indications that the bias has changed for monetary policy?

A: I would like to believe that the bias has changed a little bit; it is no longer as hawkish as it was before. Somewhere there is a realisation in this policy statement that inflation is more a result of supply side constraint than the demand side one.

There is no point in slowing down demand to an extent that it impacts growth; so probably there is less hawkishness than expected.

But clearly RBI will be on guard against the inflationary expectations. So somewhere they are trying to shift focus to future expectations of inflation from the demand side problems to the supply side ones that we are facing right now.

Q: Do you think bond yields could soften to below 8% now or would that be too optimistic?

A: My personal guess is that yes, the RBI has thrown the lifeline at the bond traders and bond market is now factoring in the demand for SLR requirement, which will force the banking sector to continue to bid in the government auctions. So, my personal feeling is that yes, the 10-year bond yields should now be settling down below 8%.

Q: What about the stock market? What kind of cue should it take from the credit policy?

A: From a stock market point of view this is a very well fed policy. It throws away the discomfort that people had developed some time back - ‘Is RBI trying to slowdown growth just to tame inflation’, ‘Is RBI so bothered about inflation that it will kind of take away the momentum of the economy’. I think this credit policy has removed all those doubts forever, which is very positive.

The market today is probably a little confused in terms of direction but the earnings season is coming out pretty good. The monsoon expectation is fairly positive and this credit policy is positive. So in a confused market, with people sitting on cash whould see a positive momentum rather than a negative one.

Q: The policy is clearly mentioning that it is focused on inflation and inflationary expectations. It does not give an implication, nor does it give an instance that it wants to give growth a chance or anything of that sort, but it merely wants to wait and see how inflationary expectations are panning out. It is not bothered about checking out how growth is panning. Your comments?

A: Your point is absolutely correct. Clearly, the RBI is trying to balance things. Earlier, the market was at one extreme, where we probably felt that RBI would like to control inflation, even if that means growth has to come down to 6-5-3%. This is something that had happened somewhere in 1997 post the Asian crisis and before that when the interest rates were hiked to support currency, which in turn impacted growth significantly.

Somewhere the was a fear in the market that the RBI may repeat the hard stance of 1997, where inflation becomes priority, currency becomes priority and growth was less way behind. I think now the market will be comforted, notwithstanding what the written statement is, that probably the RBI is going to balance inflation, as well a growth and that it will not let growth to go down to 6-7%; they will probably maintain it in a reasonable range so that this momentum of last four years is not wished away.

Q: In case you see inflation numbers coming adverse, the RBI is also making a very pointed reference explaining its CRR hike on February 13 and on March 30. It seems to have a congeniality dislike whenever banks go and out their surplus cash in the reverse repo window. That seems to be triggering off all the CRR hikes, which is explained adequately. If repo or CRR is hiked how do you think the stock market and the bond markets will react?

A: On the CRR side probably the measures are being treated on the short term side. Like in China where the CRR keeps on increasing with regular frequency, much faster than India and the stock market doesn’t give too much importance to it, we will probably end up having similar scenario where the market would expect the RBI to raise CRR to balance liquidity on a short term basis to control inflationary expectations and they will be willing to give a chance to RBI that just by managing liquidity, they will bring down inflation without impacting growth and they will release liquidity back as and when needed.

However, on the rate side, clearly the RBI will keep the options open; there is no doubt about it. Inflation continues to be adverse mainly because of some problems coming on the demand side front and not entirely due to supply side constraints and in that situation, clearly the RBI will raise rates as a result of which, the markets will have to factor that in. But today they remain hopeful that inflation will ease off due to the steps taken in the past, as well as due to the interest rates being raised in the past.

The liquidity has been tightened and probably the base effect will also come into play, which will probably ensure that the expectation of future inflation will start cooling off and that gives some hope on the economic momentum. Overall it is a balanced policy, which people would like to believe rather than completely biased in favour of inflation.

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