‘Global mkt changes would impact India economy’
Abrupt changes in currency markets and related interest rates would have an impact on the Indian economy, although it could be smaller than for other emerging economies, India's central bank governor said on Monday.
By PTI |
MUMBAI: Abrupt changes in currency markets and related interest rates would have an impact on the Indian economy, although it could be smaller than for other emerging economies, India's central bank governor said on Monday.
Yaga Venugopal Reddy also said policy makers intended to keep annual inflation below 5 percent in the medium term. This figure is lower than the Reserve Bank of India's (RBI) estimate of 5.0 to 5.5 percent by the end of the fiscal year next March.
"The common intention of the government and the RBI is to maintain annual inflation below 5 percent in the medium term," he said in a speech delivered to an international banking seminar in Singapore. The speech was posted on the central bank's Web site.
Reddy said any abrupt adjustment in global imbalances could flow through to Indian corporates, banks and households.
"Any large and rapid adjustments in major currencies and related interest rates or current accounts of trading partners would impact the Indian economy, though the impact on India may be less than on other emerging market economies," he said.
"There could be a spill-over effect of global developments on domestic interest rates and thus on fisc (public finances) also." The central bank has raised its short-term interest rate three times during 2006. The key reverse repo rate, at which the central bank absorbs excess liquidity, is at 6 percent now.
The central bank next meets to consider interest rate policy on Oct. 31, and the market is uncertain on the outlook for rates.
Reddy said household budgets could be under pressure if there was an increase in interest rates.
"There is a risk that rise in interest rates in general could impact the housing market and expose the balance sheet of the households to interest rate risk," he said, adding this could hurt banks' balance sheets, although not by a dangerous amount.
"The overall banking sector's exposure to housing loans being relatively small, adverse developments may not have any systemic implications on the banking sector," said Reddy.
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