More action from IMF needed to reduce Euro zone spillover, says RBI

Stresses need for action to stop further deterioration in the global economy

A Reserve Bank of India (RBI) senior official said today that global institutions such as the International Monetary Fund (IMF) need to take more initiative to limit the spillover of halting growth in the Euro zone to other countries. He also stressed the need for action to stop further deterioration in the global economy.

Deepak Mohanty, executive director at the central bank, in a paper presented today at the finance group meet of the South Asian Association for Regional Cooperation (Saarc) in Islamabad, expressed RBI’s thoughts on the impact of the Euro zone crisis on South Asia.  

“Speedy implementation of a complete banking union in the euro area, with an integrated regulatory and supervisory structure, assumes importance,” he said.

In December 2012, European finance ministers had agreed to make the European Central Bank (ECB) the common supervisor for banks in the region.

Mohanty said South Asian countries also needed to be better prepared to avoid negative spillover. “Our (South Asian) economies need to strive for increasing resilience, while being prepared to deal with the negative spillovers from the crisis,” he said.

The immediate concern for India is to reduce the high current account deficit (CAD), he said. “In the medium term, India’s efforts to diversify trade towards emerging market and developing economies should be stepped up,” he said.

Given the need, “there is greater scope for trade and financial integration in the Saarc region, which will be mutually beneficial”.  

Financing India’s CAD has become a challenge due to volatile capital inflows, he said. Mohanty listed the measures taken by RBI and the government to contain the impact of imports of two major items in the import cart, oil and gold. While subsidies on oil products are being slowly reduced, the import duty on gold had been raised and bank finance on pledged gold had been restricted, he said.