New Delhi: Reserve Bank Governor Y V Reddy on Monday said that imbalance in the growth of financial sector and real economic sectors could lead to bubbles and possibly increase risk in the economy.
"Without the real sector development in terms of physical infrastructure and improvement in supply elasticities, the financial sector can even misallocate resources," PTI quoted Reddy as saying.
"Public policy may have a crucial role to play in ensuring balanced reforms in both real and the financial sectors," he added.
While financial sector is the money-issuing part of the economy, the real sector, - agriculture, industries and non-financial services - is the money-holding segment that produces goods and services.
He said that policy makers must ensure there are no financial sector constraints on real sectors.
“Decision makers should also make sure that reforms in financial sector complement the pace and process of reforms in the real sectors, along with fiscal empowerment,” he said.
On emerging challenges to monetary policy, Reddy said that every country should take a holistic approach to the trinity - free flow of capital, fixed or managed exchange rates and independent monetary policy.
However, he favoured a close coordination between monetary and public policies to ensure management of the trinity in emerging economies.
(With agency inputs)
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