YV Reddy, governor, Reserve Bank of India (RBI) has called for innovative ways of cooperation among the global central bankers to tackle simultaneous challenges emanating from recent financial turbulence..
?These relate to 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,? said Reddy while speaking on the topic ?Financial Globalisation, Growth and Stability: An Indian Perspective?, at the International Symposium of the Banque de France on Globalisation, Inflation and Monetary Policy, held in Paris on Friday
The simultaneous changes relate to 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.
The recent turbulence in financial markets and institutions and the importance of harmonised and coordinated response of public policies indicate the significance of countercyclical fiscal and monetary policies. It is possible to argue that similar harmonisation between monetary policy and prudential policies would be of some value as part of counter cyclical measures, he explained
Also in regard to regulation and supervision over banks, it is useful to explore whether the special status of banks in the financial system and the need for active coordination among regulators and supervisors needs to be reaffirmed, he emphasised.
According to Reddy, the link between open capital account and growth performance is not fully confirmed by the experience of the two largest emerging markets, though such a link was not entirely refuted either. In view of limited experience so far, it is also useful to explore the link between movement in asset prices and financial integration vis-?-vis trade integration, he added.
In any case, the assumption that a managed capital account generates adverse sentiments in financial market is not fully borne out so far by the two aforesaid examples which experience large capital inflows. ?This points to the need for assigning greater weight to macro-economic fundamentals, than to the state of capital account openness,?? avers Reddy.
Relative to trade in goods, externalities are more prevalent in regard to financial sector, especially the banking sector. Hence, some regulation is essential and it tends to be national. However, the financial flows are rapid due to modern technology and could be quite substantial, but in view of global scale, it becomes extremely difficult to identify or enforce the rules of origin in regard to financial flows, he explained.
