Financial stability key challenge: RBI

Reserve Bank of India (RBI) today reiterated its view that ensuring
financial stability can, under certain circumstances, assume
overriding importance relative to other more explicitly pursued goals.

Y V Reddy, Governor, RBI, while presenting the third quarter review of annual statement on monetary policy said: "Developments in global financial markets since the Mid-Term Review of October 2007 present several issues that need to be monitored carefully in the context of the implications for EMEs. First, alongside inter-bank term interest rates, corporate credit spreads and those on mortgage-backed securities have widened since early October as concerns relating to the possibility of prolonged disruption to credit intermediation have deepened.

"In the credit markets, investors are increasingly demanding risk premia for product complexity and exposure to asset-backed commercial papers (ABCPs) and structured investment vehicles (SIVs). Second, the impact of the recent financial market turmoil has been sizeable on banks, particularly internationally active banks from both sides of the Atlantic.

"Several large banks have already recognised substantial losses
on holdings of collaterailised debt obligations (CDOs), mortgage-backed leveraged products and the picture continues to unfold. Market perceptions of increasing systemic risk in the banking system are being reflected in declines in bank share prices, a sharp increase in spreads on credit default swap (CDS) and growing concerns relating to off-balance sheet positions.

"Third, as pointed out in the Mid-Term Review, the responses of central banks to recent events have demonstrated that ensuring financial stability can, under certain circumstances, assume overriding importance relative to other more explicitly pursued goals.

"The unfolding of global developments in recent weeks and the responses of monetary authorities provide an indication of the threat to growth and financial stability worldwide, bearing out the Reserve Bank's stance of enhanced vigilance to be able to respond appropriately to global financial and monetary conditions."