Mumbai: Reserve Bank today ruled out overheating of the economy due to large capital flows but asked banks to be "watchful" of rising defaults in consumer and home loans.

"Now all the (economic) indicators point to greater normalcy than before and the only area of some concern is overhang of liquidity which we have addressed to some extent," RBI Governor Y V Reddy said when asked if there was overheating of the economy as made out in certain quarters. There were early signs of overheating in the past which Reserve Bank has been able to manage, Reddy said, adding that now the economy was stable and "we would expect the situation to continue."

Any fears of overheating is due to some misunderstanding and some wrong interpretation, he said. To a question if a sub-prime crisis was in the making in the consumer loan market, as feared by former deputy governor S S Tarapore, Reddy said it will not be right to call it a sub-prime crisis but defaults have slightly increased in consumer loans and home loans.

"Tarapore flagging off the problem is relevant but indicating the magnitude in my humble view is perhaps exaggerated. But it is important enough to be watchful," Reddy told PTI. Loans to borrowers who have poor or deficient credit history is called subprime lending by banks. The US economy was hit by large defaults due to subprime lending.

Source : PTI