RBI not averse to policy tools to check instability

Sunday February 14, 02:45 AM

 Source: Indian Express Finance


The Reserve Bank of India is keeping a close watch on the
expansion of credit growth and its impact on asset prices.
Speaking at a seminar on Saturday, RBI governor D Subbarao
said the central bank was not averse to using policy tools to
prevent financial instability arising from faster credit growth.

"I do not want to rule out the use of monetary policy instruments
 for the purpose of financial stability if the asset price build-up is
driven by credit build-up," the governor said while warning that
asset price bubbles stemming from credit build-up could lead
to serious financial instability in the economy.

Subbarao also hinted that RBI was reworking on a
plan for fuller capital account convertibility.

"We have a road map for capital account convertibility ... the road
 map itself is very dynamic... We are still traversing ... but
 we will re-work the road map depending on global developments,"
Subbarao said while addressing the concluding day of the two-day
seminar on Challenges to Central Banking in the Context of Financial
 Crisis, organised by RBI here on Saturday.
In the aftermath of global financial crisis, RBI had adopted a cautious
 stance on financial reforms, including the full convertibility of the local currency.

Speaking about the current concern over inflation, the governor was of the view
 that pure inflation targeting would not work and the central bank was working
on other variables as well, including growth and financial stability.

"We are concerned about inflation but we are concerned about
other variables as well," he said.
The governor also mentioned that price stability,

 though necessary, is no guarantee against financial stability.
"As you know, much of the inflation is because of the supply side
 factors, which was basically driven by the food prices.
 The monetary policy is an ineffective tool to target supply
side inflation," Subbarao said. He also explained why India
 had not adopted explicit inflation even though price stability
 was clearly one of the overriding objectives of the Reserve Bank.

Commenting on other currencies of major economies,
 Subbarao said the dollar dominance was unlikely to be
 replaced in the near future as it was widely accepted by all.

"The dollar is a dominant currency and I don't think we will
decide in a conference of G-20 or the IMF that we will have
some other currency," he said.

Subbarao was categorical in his remarks that the
international monetary system was inadequate to prevent
 a major structural problem, that is global imbalances had
 to manifest in the form of some crisis or the other at some
 stage. He noted that even though India did not contribute
 to global imbalances, it has to face the consequences.