The Hindu Business Line : Reddy for cooperation among central bankers

The current global financial turbulence warrants significant and innovative ways of co-operation among central bankers across the world, Dr Y.V. Reddy, Governor, Reserve Bank of India, said. Dr Reddy was speaking at the International Symposium of the Banque de France on Globalisation, Inflation and Monetary Policy.

The abrupt and large shifts in monetary policy measures of the major economies, major realignments in exchange rates within a short period and unprecedented inflationary pressures due to food and energy prices have posed challenges to the monetary policy. "These warrant significant and innovative ways of cooperation among the central bankers," he said.

The acute dilemmas arising from global food and energy prices as also from financial market turbulence need to be factored-in while evolving appropriate policy responses, he added.

The Governor also reiterated the current weightage given by the Reserve Bank of India to price and financial stability while recognising the twin objectives of growth and stability.

"The large segments of the poor tend to reap the benefits of high growth with a time lag while the rise in prices affects them instantly. Further, we recognise the limited capacity of the poor to bear risks that may occur in the real sector by virtue of developments in the financial sector, in the absence of social security mechanisms and public safety net," he said.

He also emphasised the need for managing capital flows through short term instruments while continuing work on development of the financial markets.

The Governor argued that the level of current account deficit in respect of emerging market economies that is generally considered as sustainable by the global financial markets may be lower than the sheer volume of capital inflows in these economies.

The approach of encouraging capital outflows may not be of great help in the short run because a more liberalised regime generally attracts higher inflows, he added.

Globalisation

Dr Reddy said that globalisation had helped to bring down inflationary pressures. He said that China and India, which have been major contributors to the price moderation so far, have remained relatively less open on capital account and have a moderately integrated financial sector.

The assumption that a managed capital account generates adverse sentiments in the financial market is not fully borne out so far by China and India which experience large capital inflows.

Dr Reddy said that this points to the need for assigning greater weight to macro-economic fundamentals than to the state of capital account openness.

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