RBI finally gives its views on sub-prime crisis

The RBI, for the first time, has given its views on the sub-prime crisis.

It has said that further deterioration will lead to reassessment of risk of investors. It added that the emerging markets might face further outflow of capital. The dominance of hedge funds will add fuel to fire it feels.

According to the RBI, global financial volatility will impact growth and stability.

On the issue of inflows, the RBI said that a significant part of FII inflows is in the form of PNs & sub-accounts. The portfolio flows are volatile and can reverse direction, the RBI said. India is not immune to global volatility and risky flows.

RBI has cautioned banks and corporates to be vigilant. It said that banks and corporates should keep risk strategies in place. They should monitor exposures and hedge them to avoid shocks, the RBI said.

On inflation, the RBI clarified that financial stability will assume more importance in its monetary policy. It said that its July 2007 monetary policy stance would continue. The inflation has come down, but it will keep a vigil on prices, the RBI said.

It said that excess capital inflows are making monetary management complex. Monetary management in India is more complex vis-à-vis other emerging markets, the RBI feels.