The Reserve Bank of India (RBI) has made it clear in the latest monetary policy review that even though it would continue to support the cause of faster economic growth, there would be no relaxation in the objective of price stability and avoiding bubble economies. In this wake, the apex bank may take some more steps going forward to suppress formation of an asset bubble.
The central bank pointed out that the real estate sector in India had not witnessed as much correction as was expected, particularly in the commercial real estate space. In this wake the banking regulator raised the provisioning requirements for all loans given to developers. Such a move would make credit costly for the sector and help prevent an asset bubble.
Future actions of the apex bank in this regard may focus on controlling capital inflow, especially debt capital flows such as external commercial borrowing, etc that can also contribute significantly to a real estate bubble.
The RBI had earlier liberalised the limits on such borrowings significantly in wake of the severe credit crunch being faced by the industry after collapse of Lehman Brothers in the US last year. However, now that some segments of economy seem to be running ahead of the fundamentals, the Indian monetary authority may reverse some of these measures.
The RBI in its latest policy review has left all key rates unchanged except the statutory liquidity ratio (SLR) which has been raised by 100 basis points. The overall tone of the policy review, however, certainly sounded hawkish suggesting that the RBI while was willing to help the case of faster growth, it was not ready to forgo the issue of price stability which it contended was its top duty.