Sensex surge to spill over into asset prices: Mohan

Mumbai, Nov 29 | Updated: Nov 30 2006, 09:07am hrs
The Reserve Bank of India (RBI) which has remained sensitive to the ongoing surge in the stock market expects the wealth effect to spill over into asset prices. While addressing the fourth annual conference on cash, treasury and risk management in India held at New Delhi, Rakesh Mohan, deputy governor, RBI, pointed out the need for serious analytical work to explore the link in the movements between commodity prices and asset prices.

He mentioned the need to remain alert and proactive, identify and address newer risks, eschew harmful incentives and adjust the regulatory environment to address any unforeseen contingency in the economic environment. As financial development takes place in India further blurring of distinction between different types of financial intermediaries is likely to take place. Given the increasing presence of large financial conglomerates, including foreign ones, Mohan pointed out the need to consider the development of a more organised approach to the regulation and oversight of the emerging financial conglomerates.

Conglomerisation of financial activity raises the possibility of systemic risk with attendant implications for financial contagion, which lies at the very root of financial instability.

Opening up of the economy has meant that interest rates have become a more potent tool of monetary policy, affecting consumption and investment decisions of the population in a fashion more rapidly than was the case earlier. In this context, Mohan highlighted the need for central bankers to be continuously alert and watchful, not only to domestic but also global developments.

Continuous and pro-active efforts towards developing a robust financial system and instituting appropriate market surveillance mechanisms that can throw up early warning signals of financial distress are important parameters of such resilience.

He also mentioned the need for keeping a track of traditional measures of consumption and investment, and observing that the knowledge flows across borders in order to assess the impact of its decisions on the real economy. Mohan also pointed out the necessity for closer and continuous coordination among the various policy-making bodies, including an even broader set of players such as accounting standard setters, legislators and tax authorities.