The Reserve Bank of India (RBI) on Tuesday said that an exit from an easy monetary policy must be calibrated in a manner that kept inflationary expectations well-anchored.
Speaking at the India-China Financial Conference, RBI Deputy Governor Shyamala Gopinath said that for emerging economies, such as India, the challenge was not to repair the financial sector or to curb excessive growth relative to the real sector, but to bring stability with a sound oversight to further the task of financial empowerment.
Going forward, managing capital flows and fiscal consolidation would be major short-term challenges for the country, Gopinath said. “The case for return to a path of fiscal consolidation, when there are convincing signs of recovery, need not be overemphasised,” she added.
With reform of financial institutions across the world on the agenda, the trade off between the high quality capital and the cost in meeting the genuine financing needs of the economy would have to be finalised.
While identifying systemically important entities, in addition to their size, there is a need to assess interconnections and complexity while calibrating higher capital and liquidity requirements, according to her.
She said while the issue of leverage has been sought to be addressed for banks, there was an equally pressing need to address this in the larger context of leverage by non-banking entities through banks and funding markets, which may be currently out of regulatory oversight.
“Prudential frameworks will also need to address the concerns regarding intermediation in foreign currency through the financial sector, which posed systemic risk in the recent crisis,” she added.
Speaking on reforms in accounting standards, Gopinath said there was a need to reduce pro-cyclicality in accounting in the case of fund-based leveraged financial entities to reduce a build-up of systemic risk. “For this purpose, accounting standards must promote provisioning based on expected losses, that is, to permit a forward looking approach. On the use of fair value, it must be recognised that this system depends on continuous availability of market prices and liquid markets.”
