RBI Governor Raghuram Rajan today said domestic policies need to be carefully calibrated to withstand global headwinds due to China's slowdown and the US rate hike, even though India remains "relatively better placed" to handle volatilities.
"The recent Fed Fund rate hike and the developments in China call for a careful calibration of domestic policies to withstand global headwinds," Rajan said in the latest Financial Stability Report (FSR).
The FSR is released by the RBI on behalf of the Financial Stability and Development Council (FSDC).
In his first comments following his American counterpart Janet Yellen's decision to hike rate by 0.25 to 0.50 per cent, Rajan said though "we appear to be relatively better placed" there are challenges, including a possible spike in inflation we need to stand guard against.
The challenges will emanate from weaker growth prospects in the key advanced and emerging market economies, combined with tighter financial market conditions and weak commodity prices, he said.
In the run-up to the much anticipated rate hike by the US Fed in over eight years, Rajan had said that the country was well prepared to face the volatility in the market.
Significantly, the market and the rupee have gained in reaction to the development since then.
On inflation, controlling which has now become the primary function of RBI's monetary policy, Rajan flagged concerns over the impact of erratic climatic conditions.
"Despite domestic inflation coming down significantly, we should not lose sight of the fact that the climatic conditions have tended to be more erratic and unpredictable. This will have an impact on the volatility of inflation and perhaps its level," Rajan said.
It can be noted that after trending down for nearly a year, the retail inflation rose to a 14-month high at 5.41 per cent in November while the declining trend in wholesale price inflation began to taper off with the November print coming in at (-)1.99 per cent against (-)3.8 per cent in the previous month.
Vulnerabilities of the corporate sector and the impact of their weak balance sheets on financial system also need closer monitoring, Rajan said.
The Governor's list of challenges also included cyber security, which he called more of a "strategic issue" which demands board level understanding of the threats and solutions.
