Mumbai: India cannot be immune to global developments even though local banks have insignificant exposure to the subprime crisis, and the Reserve Bank of India (RBI) is ready to act as needed, its governor said on Tuesday.
Global uncertainties looked as though they would be resolved later rather than sooner, although domestic factors in the Indian economy were largely as anticipated, Yaga Venugopal Reddy said.
“India cannot be immune to global developments but we, in the RBI, are actively monitoring the global developments, articulating our assessments as well as responses in regard to impact on India and are in a state to act, as appropriate, in a timely manner,” Reddy said at a banking conference.
He pointed to volatility in money, credit and currency markets, as well as assets prices and commodity prices, particularly oil and food, as reasons for vigilance.
“The current phenomenon of simultaneous volatilities should be viewed in the context of possible repositioning of the world’s dominant reserve currency, involving significant wealth, income and terms of trade effects,” he said.
Reddy met European Central Bank President Jean-Claude Trichet on Monday, and told reporters they agreed the current environment was a challenging one for policy makers.
“As far as the global uncertainties are concerned, we had expressed the issue ... if at all, the diagnosis is becoming more difficult, and it looks as though the uncertainties may be resolved not sooner but perhaps a little later than what we originally thought,” he told reporters.
In his speech, Reddy said Indian banks had an insignificant exposure to the US subprime market, and added that while there were some reports of rising bad loans, the central bank’s preliminary assessment was these did not have systemic implications for solvency or liquidity.
Still, the central bank was watching for any spillover of financial market turmoil into the real economy, he said.
The Indian stock market hit a series of record highs through September and October as foreigners bought almost $9 billion of shares, raising concerns of an asset price bubble amongst policy makers.
The foreign inflows helped drive the rupee to its highest against the dollar in almost 10 years earlier this month, despite heavy intervention by the central bank that subsequently complicated its liquidity management.
Renewed concerns about the subprime fallout have hit global markets this month, and the rupee and stocks have fallen from their highs as foreigners have turned net sellers of stocks.
Reddy told reporters that domestic factors were on anticipated lines, noting that credit growth had slowed to be closer to levels the central bank was comfortable with.
“We are monitoring carefully monetary aggregates as we mentioned in the monetary policy (review). A major issue exercising our mind relates to monetary aggregates and liquidity,” he said.
“Broadly it’s (credit growth) closer to what we wanted it to be and away from what we are uncomfortable with,” he noted.
In annual terms, credit growth has slowed to under 24% from 30% at the start of the year.