Business Daily from THE HINDU group of publications
Saturday, Sep 08, 2007
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Business Daily from THE HINDU group of publications Saturday, Sep 08, 2007 ePaper |
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Money & Banking
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Financial Markets Volatile capital flows pose challenges: Reddy
Speed and magnitude of flows very high Global uncertainties matter of great concern High commodity prices may present current account shocks
Dr Y. V. Reddy
Our bureau Mumbai, Sept. 7 Emerging market economies (EMEs) are faced with the problem of increasing capital flows. These flows, which are also volatile in nature, could be beyond the capacity of the domestic economy to absorb, said Dr Y. V. Reddy, Governor, Reserve Bank of India. Dr Reddy was speaking at Sveriges Riksbank, Stockholm, Sweden on Friday. Dr Reddy said the choice of instruments for sterilisation and other policy responses were constrained by factors such as openness of the economy, depth of the domestic bond market, health of the financial sector, health of public finances, the country’s inflationary track record and the perception about the credibility and consistency in macroeconomic policies pursued. Deepening of financial markets may help in absorption of large capital inflows in the medium term. “But it may be insufficient at the current stage of financial sector development in many EMEs, particularly when speed and magnitude of flows are very high”, Dr Reddy said. Some of the EMEs are also exposed to adverse current account shocks given the high commodity prices. Going forward, global uncertainties in financial markets are likely to concern all monetary authorities. But for EMEs the consequences of such macro or financial disturbances could be more serious, the Governor said. Though the efficiency of the banking and financial sector has been strengthened in many EMEs, matching the operations of large conglomerates and foreign institutions with local public policy was still a challenge for domestic financial regulators in many EMEs, he pointed out. The focus of many EMEs would be on forming appropriate policy strategies and contingency plans. Among the factors that are carefully monitored, currency markets, liquidity conditions, globally dominant financial intermediaries, impact on real sector through credit channel and asset prices are significant, Dr Reddy said.
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