NEW YORK (Dow Jones)--Huge domestic demand within India provides a buffer to global economic turbulence, said the deputy governor of the country's central bank. "The advantage of the Indian economy is that it has a high level of domestic demand," said Subir Gokarn, deputy governor of the Reserve Bank of India, speaking in New York. While this is positive in the longer term, in the short term, it creates volatility, he noted. As seen in the previous credit crisis, this volatility creates a liquidity crunch. "Sharp exits of capital pose the risk of liquidity constraints," Gokarn said, noting the country's monetary policies have tried to maintain liquidity. Speaking about the rupee declining, he said there is "no target to defend it at any particular level, no line in the sand." Any intervention is for "smoothening, not targeting," he said. A major challenge for the country is inflation, he said, in an environment where food prices are rising and oil prices are not declining despite slower growth in the global economy. India needs to increase its food productivity, he said, in an attempt to ease the situation. It is also essential to rebalance demand such that there is a balance between consumption and investment.
WSJ
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