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India needs tighter policy to prevent asset bubbles: OECD

OECD, a grouping of mostly developed nations, today warned that emerging economies are facing a danger of overheating and called for much tighter monetary policies in countries like India and China to stave off asset price bubbles.

business Updated: Nov 18, 2010 18:43 IST

OECD, a grouping of mostly developed nations, on Thursday warned that emerging economies are facing a danger of overheating and called for much tighter monetary policies in countries like India and China to stave off asset price bubbles.

"Overheating in emerging-market economies poses a serious risk," the Organisation for Economic Cooperation and Development (OECD) said.

"A boom-bust scenario cannot be ruled out, requiring a much stronger tightening of monetary policy in some non-OECD countries, including China and India, to counter inflationary pressures and reduce risk of asset-price bubbles," Paris-based OECD said in its latest economic outlook report.

Overheating generally refers to a situation where demand excessively outstrips supply, resulting in exorbitant rise in prices.

The suggestion by the grouping, whose member countries account for over 60 per cent of world economy, about tighter monetary stance came even as there are indications that RBI would pause its hawkish policy amid fall in inflation and industrial growth.

Crisil's chief economist D K Joshi said the threat of overheating of the economy because of excess demand in comparison with supply is not as much there, but prices are rising in some areas, particularly in stock market due to high inflow of foreign funds.

He noted that prices of residential property have also risen, but RBI has been proactive.

"The problem of overheating may be there if RBI has been following loose monetary policy," Joshi said.

RBI has raised its short term lending (repo) and borrowing (reverse repo) rates for the sixth time by 150 and 200 basis points respectively this year till November.

With inflation coming down to 8.58 per cent in October and industrial growth falling to 16-month low of 4.4 per cent in September, RBI is expected to press a pause button in its monetary stance.

Indications of halt in tight monetary stance were given by the central bank itself in its November monetary review.

Joshi said inflow of foreign funds is leading to rise in stock prices, but the situation has not come to a stage where such overseas money needs to be curbed.

Meanwhile, calling for increased investment, RBI Governor D Subbarao has said the central bank would prefer more FDI inflows than FII money.

So far this year, FII have pumped in over USD 28 billion into the Indian stock markets.

According to the OECD, India has continued with its monetary policy normalisation efforts in recent months.

"With domestic demand continuing to grow strongly, and only limited spare capacity, additional policy tightening remains warranted," the grouping noted.