RBI cautions against US subprime-like crisis

The Reserve Bank of India  in its annual report said that there is a need to be vigilant to future non performing assets (NPAs) and US-like subprime woes.

I also maintained an uncertain outlook on international crude prices.

RBI said that inflation had risen above tolerable limits, but would ease if oil prices decline and therefor its top priority was to prevent a further pressure on prices.

According to RBI, there may be some upward revision in petrol and diesel prices. It is in favour of greater decontrol of petroleum product pricing. It said that the pass-through of rise in crude oil prices remains incomplete.

The report said that growth in monetary and banking aggregates has started to dip and the equity markets are reflecting risk aversion and rise in uncertainty. There is a threat to global growth; stability looms over the near term and there is strong evidence of demand pressure, the report said.

RBI's monetary policy will continue to address demand pressure. According to the annual report, fiscal year is under some stress on subsidies, loan waiver and pay hike. The frequent off-budget bond issuance is a challenge to monetary management and there are downside risks to FY09 industrial growth momentum. Tax, duty sops may improve prospects of recovery in momentum but uncertainty on capital flows outlook has heightened, the report said.

The RBI feels that there is a need to continue gradual capital account convertibility reforms and it can flexibly use prudential measures for capital account management.