Issues of ensuring financial stability and enlarged public debt would take centre stage in the fiscal and monetary policies of the country, while inflation is expected to get lesser emphasis, said former Reserve Bank of India (RBI) governor Y Venugopal Reddy.
He said there was limited evidence to directly correlate higher inflation with higher growth and vice-versa as there was lower inflation at five per cent while gross domestic product growth rate stood at nine per cent when he was the RBI governor. "I had increased the interest rates and still the growth rate was higher," he said while delivering the foundation lecture on 'Future of Financial System: Emerging Issues' at School of Management Studies of University of Hyderabad. He said the crisis in the global financial system was not over yet.
Commenting on the possible structural shift in the system towards higher inflation in the economy, Reddy said he doesn't have sufficient data to express his view, but it was expected to have lesser emphasis in overall scheme of enforcing financial stability among other things that enable growth.
"We are in the times of heightened uncertainty and uncomfortable volatility," he said reminding that the global regulatory coordination of financial system is only expected to come into play at the end of the current decade.
Suggesting what the US economy was going through was a continuation of 2008, he said the actions of the American policy makers only exacerbated the problems.
“Offering bail outs to larger banks against the market discipline just because they were said to be too big to fail, had only resulted in making them even larger post reforms,” he said.
However, he said, the situation in India was different as there exist no such large financial intermediaries and though 40 per cent of the forex reserves in the country are controlled by foreign banks their number is also large.