RBI says economy susceptible to global risks

MUMBAI (Reuters) - India's economy is still susceptible to risks from global developments in the form of inflationary pressures and repricing of risk by financial markets, the Reserve Bank of India (RBI) governor Yaga Venugopal Reddy said.

Reddy said excessive leveraging has enhanced the vulnerability of the global financial system and large changes in liquidity conditions were obscuring the assessment of risks.

"Given the flux associated with both the financial markets and the monetary policy settings globally, India cannot be immune to these developments," he said, in a speech delivered on Wednesday in Washington.

The speech was made available on the RBI's Web site on Thursday.

"Contextually, we in the Reserve Bank are, therefore, maintaining enhanced vigilance to be able to respond appropriately to the prevailing heightened uncertainties in global financial as well as monetary conditions," he said.

Reddy said there were many challenges facing the economy in the medium term, which include improving farm productivity, augmenting infrastructure and a shortage of skilled manpower.

"The recent upwards trends in global prices of major food items have significant implications for the domestic agricultural sector and overall macroeconomic and financial stability," he said.

But short-term prospects were by and large benign despite global uncertainties, he said.

The RBI expects the economy to grow by 8.5 percent in the current fiscal year ending in March, lower than growth of 9.4 percent in 2006/07.