RBI chief points to ‘complex challenges’ to India’s financial stability in globalised regime

According to Reserve Bank governor, Dr D Subbarao, India' integration into the global economy would throw up complex challenges to its financial stability and the  country would be increasingly exposed to the forces of globalisation.
 
Subbarao who as speaking at a FICCI IBA seminar in Mumbai yesterday said India cannot be globalising and the same time remain decoupled from the global economy. If financial stability in any part of the world is jeopardised, India's financial stability would be impacted too.
 
He added that the apex bank was retooling itself to safeguard financial stability and to this end has set up a multi-disclipinary Financial Stability Unit, which would compile regular stability reports.

The report would present an overall unified assessment of the health of the financial system and provide an analysis of potential risks to systemic stability, the governor said. He added that the apex bank planned to come out with the first report in the next few months.

He said that India would exit the expansionary monetary regime sooner than other countries with inflationary pressures growing. He did not however give a timeline for exiting the accommodative regime.
 
Subbarao pointed out that the country's financial stability could be impacted under the burden of tensions between financial and monetary policies.

He added that if governments continued to incur large fiscal deficits it would be that much more difficult for central banks to maintain price stability.

He said that the current crisis has shown that price stability was not sufficient to ensure financial stability though price stability remained a necessary for financial stability.

 He said it was imperative that governments both at the centre and in the states return to a path of fiscal consolidation for several reasons including the need to ensure continuance of financial stability. He added that rising yields could result in mark-to-market losses for banks thereby impacting their profitability and impinging financial stability.
 
Subbarao said that higher inflation could also push the yield curve upwards which could result in significant mark-to-market losses for fixed income instruments that could have potentially adverse implications for the profitability of banks. Financial stability could thus again be impaired. 

He said however, that India would not slow down on reforms but would factor in the lessons from the crisis and accordingly rework its roadmap.