Asset prices, exchange rate to be watched: RBI

Asset prices and exchange rate movement will be closely monitored by the Reserve Bank of India, as the central bank fears that large portfolio inflows in emerging market economies (EMEs) can affect inflation and external competitiveness adversely.

In its macroeconomic and monetary development report released on Monay, the central bank said as financial markets in emerging economies had exhibited higher growth potential compared to the advances economies, capital flows to EMEs had strengthened, which had exerted pressure on the currencies to appreciate and led to upbeat asset prices.

“Given the outlook for a possible increase in portfolio flows to EMEs in the near term, their impact on the exchange rate and asset prices will have to be closely monitored because of their implications for domestic inflation and external competitiveness,” said RBI.

According to RBI, substantial increase in capital flows, led by foreign institutional investors, not only contributed to significant increase in stock prices, but also resulted in strengthening of the domestic currency against the US dollar. Also, improved global credit market conditions, coupled with widening interest rate differential, facilitated higher access to external commercial borrowings by the corporate sector, said RBI.

The quarterly House Price Index of the central bank showed housing prices in most Tier-I cities accelerated, but Tier-II cities registered some moderation.

According to the RBI data, housing prices in Mumbai are showing moderate growth, whereas prices in Delhi are growing at a faster pace, partly due to the development that happened during the Commonwealth Games.

“The number of transactions in Mumbai, which had registered a sharp rise in the third quarter of 2009-10, seems to have reached a plateau. Housing prices in Bengaluru, which were almost flat for the past one and half years, are showing signs of increase,” RBI said.