Reddy hints at more liquidity tightening

Reserve Bank Governor Yaga Venugopal Reddy on Tuesday ruled out a crisis similar to the US sub-prime impact in the country, but hinted at more liquidity tightening measures from the regulator.

"Though there are reports of accelerated emergence of non-performing assets in regard to consumer credit, housing and real estate in a few banks, our preliminary assessment is that these do not have systemic implications either in terms of solvency or liquidity," Reddy said, while speaking at a banking conference in Mumbai.

Reddy also said the regulator has seen simultaneous volatility in money, credit and currency markets, asset prices and food items, adding that "RBI is on a major extra-ordinary vigilance," to face these issues.

"The current phenomenon of simultaneous volatility should be viewed in the context of possible repositioning of the world's dominant reserve currency," Reddy said.

He also expressed confidence on the policy actions taken by the Reserve Bank to address the evolving monetary, credit and inflation environment in the country and said "there will be a more detailed account of our regulatory focus on liquidity."

Reddy also said the recent turbulence in the global financial markets were not a total surprise to the Reserve Bank, as the regulator had put a special focus on financial stability in its recent

policy statements.

However, the manner in which it (global financial turbulence) occurred was not anticipated, he said, adding that, "subsequent developments have shown that there are continuing elements of uncertainties in the global environment, which are unlikely to be clarified or resolved in the near future."

The Reserve Bank, in view of the growing global liquidity risk, has given flexibility to banks to devise their own risk management strategies as per the policy of the respective boards and has taken steps to mitigate risks at systemic and institutional levels, Reddy said.

In order to ensure the allocation of credit to the priority sector, RBI has also been reviewing the definition of the sector from time to time to match contemporary requirements, he said.

Reddy also cautioned banks against excessive reliance on call money borrowings, saying that "it (the bank) may not be able to continue in the inter-bank market, in case of failure to repay the loan," and may also lead to market perception that "the bank is having fundamental problems."

Earlier, while speaking to reporters on the sidelines of the conference, Reddy said every country has to respond to capital flows with its own measures.

"Most macro-indicators are moving on expected lines. Global uncertainties worsened, diagnosis has become more difficult," he said.