Indian Council for Research on International Economic Relations

Lecture Details

Financial Stability during Periods of High Growth and Low Inflation: The Role of the IMF

December 29, 2005

ICRIER organized a lecture on ‘Preserving Financial Stability during periods of high growth and low Inflation-The Role of the IMF’ by IMF Executive Director Mr. Willy Kiekens.

With low inflation and increasingly independent and credible central banks, monetary stability has been established. Nevertheless, with the liberalization of financial sectors and international capital flows, asset price volatility and the incidence of financial crises have risen significantly, both in advanced economies and in emerging markets.

How the changes in the monetary and financial regimes during the last couple of decades explain the emergence of financial imbalances in the global economy and have increased the threat to financial stability, notwithstanding prudent monetary policies was the main subject of a talk delivered by Mr. Kiekens.

Mr. Kiekens emphasized on how, in the aftermath of the Asian Crisis, (i) the IMF has adjusted its surveillance to better diagnose the build up of excessive risks and imbalances; and (ii) the IMF has advised fiscal, monetary and prudential supervisory authorities in preserving financial stability while liberalizing the financial sector and international capital flows.

He talked about three basic questions: What are the lessons and new insights for safeguarding financial stability? How the funds adjusted its activities and policies to contribute more successfully to safe guard financial stability? And finally how the funds assess the challenges India faces in preserving financial stability?

He advised that the way the government can influence markets is no longer through direct intervention but with policy changes that are sufficiently credible to anchor, or alter the expectations that affect market prices. Financial stability depends on sound risk management decisions by mangers of financial institutions and corporations. Making sure that the governance structures promote such sound decisions is an integral part of safeguarding financial stability.

Mr. Kiekens talked about how the IMF has indeed changed dramatically during the last ten years in response to the recurrent banking and capital account crises. These changes can be divided into three categories: (i) improving transparency and timely information of markets, (ii) better analysis of the dynamics and vulnerabilities in the main sector of the economy and the linkages among them, and (iii) advising policies that anchor expectations, promote flexibility in adjusting to shocks and shifts, and liberalize international capital movements prudently.

Speaking on the role of IMF on India, he said that they support India’s cautious approach to liberalizing the capital account. He further pointed out that FDI in India is low as compared to other successful emerging markets. Improving the business climate and further lifting restrictions on foreign participation in Indian companies and banks will be beneficial. He highlighted that the stress tests, conducted by IMF, show that the Indian banking sector as a whole is resilient to a tightening of provision requirements and to deteriorations in credit quality that is typical in periods of rapid growth. Thus, many banks will only be able to sustain continued high credit growth if they are also successful in raising new capital. He also said that staff fully supports the Reserve Bank’s initiative to raise consumer awareness and fight unfair lending practices.

Mr. T. N. Ninan, Editor, Business Standard chaired the lecture. 


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