Asset bubble bigger threat than inflation: RBI

Reserve Bank of India (RBI) Governor D Subbarao today said formation of asset-price bubbles was a bigger threat than consumer inflation the world over.

“There is no evidence yet that asset-price bubbles are being formed. The threat of consumer inflation is muted,” he said at a round-table discussion organised by CNBC-TV18.

“Supply-side forces are working on inflation. And, the monetary policy is an ineffective instrument to rein in supply-side inflation. The main challenge for RBI is to support growth without compromising on price and financial stability, he added.

Referring to policy tools to manage capital surge, Subbarao said given the uncertain scenario, no policy option, including Tobin tax, was off the agenda. Should there be a surge in capital flows, we should not rule out active capital management, he said.

“Capital flows are coming on the back of India’s potential. When flows are in excess, they show lack of absorbing capacity. In the medium term, the task is to improve the absorptive capacity of economy, but going forward, calibrating reserves roughly corresponding to the current account deficit is the task,” he said.

Supporting restrictions on capital flows in some situations, C Rangarajan, chairman of the Prime Minister’s Economic Advisory Council (EAC), said, “Capital flows are welcome. It is only in certain categories we want to discourage them”