RBI calls for vigil against subprime turmoil

The Reserve Bank of India (RBI) will have to raise vigilance to effectively deal with the uncertainty in the global financial market following the US subprime crisis, according to RBI Deputy Governor Rakesh Mohan.

Most central banks globally had to maintain enhanced vigilance to be able to respond to heightened uncertainty in financial and monetary conditions, Mohan said in his address at the annual general meeting of the Indo-American Chamber of Commerce here.

The RBI has been able to keep the domestic financial system stable through a combination of economic and monetary policies. Central banks face trying challenges in terms of monetary policy, mainly due to limitations imposed by financial markets.

"Recent financial developments have drawn attention to trying challenges faced by central banks in terms of monetary policy, in particular limitations imposed by financial markets," he said.

In a crisis situation, financial stability gained more importance than inflation control, he said, pointing out to recent actions of several central banks globally to the US credit crisis.

The US Federal Reserve, the European Central Bank, and the Bank of England among other central banks had infused huge amount of funds into their banking system to ease tight liquidity conditions due to the subprime mortgage market crisis.

Risks of sustained inflation, global capacity constraints and record-high crude oil prices were the challenges that central bankers faced. The rising food prices are a cause for concern to monetary authorities worldwide.

To combat such challenges, central banks globally should resort to steps such as coordinated interventions and emergency liquidity plans, he added.