RBI cautions on prices, subprime delinquency

Written by Banking Bureau | Mumbai, Aug 30 | Updated: Aug 31 2007, 06:33am hrs
Despite remaining bullish on growth in 2007-08, the Reserve Bank of India (RBI) has expressed concern that shortfalls in farm output and infrastructure constraints could spur inflation. Also for the first time, the RBI, in its annual report for 2006-07 released on Thursday, cautioned that India could be hit hard if there were further defaults in the US housing loan market.

Further deterioration in subprime delinquencies could lead to reassessment of risk by investors across products and markets and retrenchment of capital from emerging market economies... in particular, (the) global financial market could turn volatile with attendant implications for EMEs like India, the RBI report states.

The central bank said available information thus far indicates a continuation of the momentum in 2007-08 at a strong pace, with growth impulses becoming more broad based. But higher prices for oil, financial assets and property may lift India's inflation rate, which is already higher than those in major emerging and advanced economies, commented the bank.

A continuous vigil supported by appropriate policy actions by all concerned would be needed to maintain price stability so as to anchor inflationary expectations on a sustained basis, the report said.

Strongly advocating the adoption of a gradual process of fuller capital account liberalisation over the medium term, while recognising the growing ineffectiveness of micro controls in a world of growing trade and financial integration, RBI said new kinds of FDI flows through private equity funds and venture capital funds may not necessarily have a direct link with investment in physical assets and could contain a volatile component at the margin.

Inflows to acquire existing stakes or expanding foreign stakes in Indian companies are classified as FDI, but they do not contribute to the further creation of physical assets. However, these inflows do add to the foreign resources available for investment in the economy, which would be most productive when there is corresponding absorptive capacity at the macro level, explained the central bank.