Interest rates were more effective in impacting aggregate demand and inflationary expectations compared to macro-prudential measures, Reserve Bank of India Deputy Governor Shyamala Gopinath said in a speech posted on the central bank’s website today.
She had delivered the speech in Kuala Lumpur on August 4.
“Macroprudential regulation cannot manage economic cycles or target asset prices,” the deputy governor said. “It can only provide instruments to respond to these developments to cushion the financial system from potential stresses.”
RBI is scheduled to announce its mid-quarter review of the monetary policy tomorrow. Bankers and economists expect the central bank to announce the fifth increase in repo rate this year and also to narrow the corridor between repo and reverse repo rates.
The central bank has so far desisted from increasing any risk weights on any sector since it began raising rates after slashing these during 2008-2009 to help minimise the impact of the global slowdown on the Indian economy.
“The real challenge of macroprudential regulation is strong resistance to countercyclical actions during booms,” said Gopinath. “It is difficult to lay down simple rules, as the financial system and markets are evolving and banks continue to be dominant source of funding. Suitability of tools can, of course, change as the structure of the economy and financial system changes. But regulators may have to rely on continued use of discretionary adjustments,” the speech said.
She also cautioned against short-term volatile capital flows or accentuation of carry trades which increase foreign currency mismatches of the non-financial sector. This is more so since the global policy stance remains highly accommodative and emerging market economies will have to address these issues with a range of policy tools.