RBI to be vigilant against market uncertainties

RBI to be vigilant against market uncertainties

Mumbai: India’s central bank will be vigilant and proactive in responding to any rise in global uncertainties that could threaten growth and stability in the local economy, Governor Yaga Venugopal Reddy said on Friday.

Among the factors needing close monitoring were currency markets, liquidity conditions, globally dominant financial intermediaries, and the impact of financial markets on the economy, he said in a speech at Sweden’s central bank.

“Monetary policy in India would continue to be vigilant and pro-active in the context of any accentuation of global uncertainties that pose threats to growth and stability in the domestic economy," Reddy said.

The speech is on the central bank’s Web site, www.rbi.org.in.

Concern that problems in the U.S. subprime mortgage market have impacted the wider availability of credit has roiled global markets recently.

Reddy said emerging economies such as India were at particular risk of foreign capital being withdrawn quickly.

“Of late, considerations of macroeconomic and financial stability have assumed an added importance in view of the increasing openness of the Indian economy," Reddy said in a speech at Stockholm.

Reddy said it was extremely difficult to predict how the turbulence would play out, and so emerging market economies had to arm themselves with contingency plans and defence strategies.

Reddy said though the central bank’s preferred policy instruments continued to be indirect, such as reserve requirements for banks, it would not hesitate to use direct policy instruments -- interest rates -- if necessary.

He said India’s growth trajectory appeared to be long-lasting, but cautioned that supply shocks in the prices of commodities and services could have a lasting impact on inflation expectations.

The economy grew 9.4 percent in 2006/07 (April/March), its fastest rate in 18 years, and the central bank expects it to grow 8.5 percent in the fiscal year ending in March 2008.

“It is still important for monetary policy formulation to identify the cyclical and structural components of growth achieved in recent years, despite the task being rendered somewhat difficult in an economy that is undergoing a rapid and deep structural transformation," Reddy said.