Saturday, December 1, 2007

RBI’s on guard against subprime spillover

MUMBAI: The Reserve Bank of India (RBI) has said that India can’t be immune to the global subprime crisis despite the fact that Indian banks have no exposure to the troubled housing loans market in the US. The central bank said it was keeping an eye on the spillover effect of the subprime crisis from the international markets into the Indian financial sector.

Speaking at the annual Bankers Conference organised by IBA and Bank of Baroda here on Tuesday, Mr Reddy said, “The domestic factors, by and large, are on anticipated lines although global uncertainties would be resolved later rather than sooner.” He said that the central bank was ready to respond to these global uncertainties, and was watching for any spillover of the financial market turmoil into the real economy.

The monetary aggregates that are currently beyond central bank’s comfort zone are being carefully monitored, he said, though credit growth was closer to what the central bank wanted.


In his valedictory address at the conference, Mr Reddy said India cannot be immune to global developments but we, in the RBI, are actively monitoring the global developments, articulating our assessments as well as responses in regard to impact on India and are in a state of readiness to act, as appropriate, in a timely manner. “The major reason for extraordinary vigilance by RBI is what I would describe as simultaneous volatilities in several globally significant markets, namely money, credit and currency markets; asset prices; and commodity prices, especially oil and food items,” Mr Reddy added.

The current phenomenon of simultaneous volatilities should be viewed in the context of possible repositioning of the world’s dominant reserve currency, involving significant wealth, income and terms of trade effects, he added.

Even Indian banks with overseas presence have confirmed that they have insignificant exposure to the US subprime mortgage market, though some analysts have flagged the prospect of a sort of subprime lending problem within India also, he said. However, there are reports of accelerated emergence of non-performing assets in regard to consumer credit, housing and real estate in a few banks. RBI’s preliminary assessment is that these do not have systemic implications either in terms of solvency or liquidity.

In the context of the current capital flows into the country, Mr Reddy admitted to it having posed challenges to the liquidity management for the central bank which it actively manages on a daily basis. In terms of the evolving global prudential framework, the emphasis has generally been more on capital, as a means of reducing vulnerability to risks than on prudential requirements for liquidity risk.

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