The Reserve Bank should keep its key rates high not just to fight inflation, but also to prevent the formation of asset bubbles, a top economist from Standard Chartered said today.
I think the RBI needs to make sure that the monetary policy is tight not just to address the immediate inflation challenge but (also) to prevent bubbles and inflation problems being seen in the future, the bank’s Chief Economist and Group Head of Global Research , Gerard Lyons, told reporters here.
Lyons referred to the days leading up to the real estate bubble burst in the US and the subsequent financial melt down, when “(Alan) Greenspan in the US, you could argue, kept policy (rates) too low for too long.”
With a view to tame the inflation– pegged at 8.66 per cent in April — the RBI has increased its key rates eight times over the last 12 months. The latest hike at higher-than- -expected 50 bps points was made on May 3.
The May 3 decision is considered a turning point wherein the apex bank shifted from ‘baby step’ (25 bps) approach towards raising the interest rates to a steep hike to drain out the excess demand to soothe inflationary pressures.
The RBI has also taken measures to curb any possibility of asset-bubbles formation through a string of measures such as increasing the provision coverage ratio on teaser loans which involve staggered interest payments, among others.
