"Further, high inflation rates, when accompanied by higher variability of inflation, raise greater uncertainties. These acute policy dilemmas at the current juncture between growth and inflation have to be faced in the background of financial turbulence, which is yet to calm down," the governor said at a meeting of the task force on financial markets regulation organised by the Initiative for Policy Dialogue in Manchester on July 1. RBI made the address public only today.
The global problem of rising inflation was attributed to volatile food and fuel prices.
Reddy said concern over economic slowdown in the US has mounted in view of the possible spillover to the global economy. "Threats to the global economy are emanating from advanced economies in sharp contrast to earlier crises, which stemmed from the emerging world," he said.
While maintaining that India had managed to remain largely unaffected by the global financial turmoil, he pointed out that a nascent domestic credit derivatives market, restrictions on investment in such instruments and regulatory guidelines on securitisation had helped the economy.
In the global context, the central bank chief also pointed to the risk arising from larger investment by companies in financial markets and said there had been excessive "financialisation" of corporate entities.
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"Increasingly, many of the positions of the corporate entities in financial markets may not be related to their underlying business," he said.
Listing out the various instruments used by RBI in managing the Indian situation, Reddy said central banks might have to look beyond financial sector reforms and address broader related issues that impinge on the balance between the sovereign, the regulators, financial institutions and markets.