Since repeated supply side shocks pose a constant challenge to ensuring a low inflation regime, which is necessary for achieving inclusive growth, a medium-term strategy to augment supply of essential items, by addressing structural deficiencies, needs to be put in place.

Structural rigidities continue to inhibit monetary policy transmission and consequently limit the scope of policy interventions.

Persisting fiscal imbalances over a long period increase risks to inflation through money-financed pressures on aggregate demand, interest rates through crowding out pressures and exchange rates through the twin deficit channel.

Volatile capital flows have been a potential source of instability to emerging markets. Unless they are judiciously managed, costs can magnify for an economy during a period of too little and too much of capital flows.

The infrastructure gap in relation to other countries as well as own growing demand has been a key factor affecting the overall productivity of investments. The requirement of high initial capital outlay over long-terms is a major constraint.

The potential of the financial system has not been harnessed fully due to the extent of financial exclusion prevailing today. The RBI has significantly scaled up efforts at increasing the level of penetration of bank financing in the economy.

Since the global crisis, central banks have been called upon to assume increasing responsibility for both “systemic oversight” and “macro-prudential” regulations. To discharge those functions diligently, “the issue of institutional independence and autonomy becomes important.”

From the point of financial stability, much of the challenges will emanate from complexities surrounding the assessment of systemic risks, interconnectedness, common exposures, risk concentrations in complex products and the use of obtuse and opaque models to manage and price risks.

Globalisation is at once a threat and an opportunity. The global crisis revealed how countries are interlinked beyond the conventional channels of trade and capital flows.

RELATED NEWS

Key messages from RBI Annual ReportSeptember 5, 2010

More In: Economy | Business