Indian banks can tackle asset bubble burst: Dr YV Reddy
09 May 2009
Former Governor of the Reserve Bank of India (RBI) YV Reddy launched his book India and the Global Financial Crisis today (May 8). The book, a collection of his 23 speeches during his stint as the head of the central bank, was launched by the current RBI Governor Duvvuri Subbarao.
Reddy, who headed the central bank from 2003 to 2008, has been widely credited for his contribution to the economy and many experts say his flexible monetary policies prevented an asset build-up in the country unlike in the US thus saving the economy from the global financial crisis.
Speaking at the launch, Subbarao also spoke of the steps that the RBI had taken to infuse liquidity into the system and that they may need to be reversed once the crisis gets over. "When the crisis is behind us, we need to think about managing inflationary expectations, about the medium-term consequences of policy actions in economy and on the macro economic imbalances," Subbarao said, referring to the massive rate cuts that the central bank has exercised since September 2008 to boost the economy.
Reddy, the former governor, also spoke to CNBC-TV18's Latha Venkatesh and dwelled on his stint as RBI Governor and also spoke about the Indian economy in the context of the global financial crisis.
Reddy said he was pleased with India's response to crisis. He said India's banks were reasonably strong. ''They can tackle asset bubble burst,'' he said, adding, strong domestic demand makes India resilient.
Reddy said he was of the opinion that the domestic factors lent some defence against global distress. It was domestic demand that led to India's economic growth, he said. However, he said he did not see any evidence of aggregate demand deficiency in Indian economy. ''The rural demand is still fairly strong and the financial sector was strong. ''In a way perhaps, when just as we had exaggerated optimism before, this time there might have been exaggerated pessimism,'' he opined.
The duration and severity of crisis is still unknown to the world, Reddy said, adding, that the policy measures taken in India are still to impact the economy fully. The financial markets draw comfort from RBI's commitment on liquidity, he said. Stress is confined to frictional liquidity for temporary time, he added.
Further Reddy said that barring a few, most companies and households are not excessively leveraged and the government balance sheet's forex exposure is insignificant. Forex assets and manageable current account gap, he said, provides comfort to the external side.
