RBI concerned over growing asset prices in the economy

By Staff
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Google Oneindia News

Mumbai, Mar 18 (UNI) As the rising inflation is no longer a major concern, excessive increase in asset prices and credit have emerged as major challenges facing the Central bank as this could lead to financial instability, according to Reserve Bank of India (RBI).

''As economies become more procyclical, inflation is no longer the major indicator of financial stability because strong swings in asset prices could lead to financial instability,'' RBI said in its report on currency and finance, released here today.

Over the years, it said, the changes in the monetary and financial regime globally have changed the dynamics of the markets.The liberalised and integrated financial system and markets pose fresh challenges to the Central Banks worldover as they tend to amplify existing distortions in macroeconomic management.

Fiscal discipline and, deep and well functioning of financial markets are necessary for the success of the central bank's policy strategy.

Although a reasonable degree of monetary-fiscal coordination has been achieved in anticipating of future liquidity requirements through short term liquidity forecasting model, there is a need to adapt the same to suit the future contextual settings over a longer term particularly in the light of evolving macroeconomic scenario arising out of FRBM (fiscal responsibility and banking management) stipulations, the report said.

In the context of undertaking fiscal consolidation within the FRBM framework, it is imperative that the governments do not take recourse to 'creactive accounting' in order to fulfil the targets set under the fiscal rules.

There is a need to transparently report all fiscal liabilities so that the monetary authority can accurately assess the credit needs of the Government in the long term and accordingly design its monetary policies, the report added.

UNI GC KD AG1707

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