Premature liberalization of financial markets may add to financial instability – predicts the Deputy Governor, Reserve Bank of India, Dr Rakesh Mohan. Liberalization of money and bond markets may lead to large and volatile capital inflows, intensifying complications for macroeconomic and monetary management.
Volatile rates and liquidity may create instability and even will be unmanageable for the monetary authority. “Deregulation, liberalisation, emergence of financial conglomerates and globalization of financial markets pose growing risks to financial stability,” he said. Dr Mohan was speaking on ‘India’s financial sector reforms: Fostering growth while containing risk’ at the Yale University. Dr Rakesh Mohan pointed out that the Reserve Bank of India’s policy approach in this regard would be to increasingly vigilant and proactive to any incipient signs of volatility in financing markets.
There is an urgent need to develop various segments of the domestic financial market to help in better risk management by various market participants. Dr Mohan said that there was a need to develop innovative channels for credit delivery for serving the new credit needs, with greater use of information technology an intensified skills development in human capital.
The volatility in currency and bond markets can have adverse consequences on the real economy. The real economic variable such as employment, output savings and investment etc. may be distorted due to the financial market instability. Talking about the situation in developed markets, Dr Mohan said excessive fluctuations and volatility in financial markets can make the under lying value and give confusing signals, as has been witnessed in some developed markets.