Global outlook reassuring, but uncertainty remains: RBI

WASHINGTON: India on Saturday said that uncertainty about the shape and pace of global recovery persists, even though the turnaround in the economy has been faster than expected.

"Although the global outlook is more reassuring than it was a few months ago, uncertainty about the shape and pace of global recovery persists.

While macroeconomic risks have decreased, vulnerabilities remain," the RBI Governor D Subbaro said in Washington Saturday in his address to the IMF Financial Committee meeting.

He said concerns are growing about the deterioration in the sovereign risk profile and dangers posed to financial stability in some countries, adding that the recent developments have shown the merits of a gradualist approach to allowing external financing of fiscal deficits.

"The crisis and the post-crisis experience should usher in some rethink on how and by how much debt markets be opened up for external financing," Subbaro said.

Observing that volatile capital flows have been a central issue during the crisis, and continue to be so now as the crisis is ebbing, the RBI governor said emerging Market Economies (EMEs) saw a sudden stop and reversal of capital flows during the crisis as a consequence of global deleveraging.

"Now the trend has reversed once again, and many EMEs are seeing net inflows - a consequence of a global system awash with liquidity, the assurance of a low interest rate in advanced economies over 'an extended period' and the promise of growth in EMEs," he said.

The familiar question of how EMEs can maximise the benefits and minimise the costs of volatile capital flows has returned to haunt the policy agenda.

Capital flows can also potentially impair financial stability, he said.

Subbaro said the recent crisis has clearly been a turning point in the world view on capital controls.