Apparently rejecting criticism that Reserve Bank of India's frequent rate hikes may stunt growth, Finance Minister P Chidambaram said on Wednesday world over central banks were taking such measures to contain inflation.

"Inflation expectations loom large in most parts of the world. Therefore, many central banks have responded pro-actively to tighten liquidity so that inflation is held in check," he told global market regulators here.

The finance minister's defence of the current policy comes in the wake of criticism that RBI's move to curb money supply would hurt economic growth, especially sectors like housing and auto.

Though the authorities had little control over some of these economic challenges as they originated abroad, the government would have to upgrade risk management system to covert them into opportunities, he said.

Voicing concern over the uncertainties on global interest and exchange rates, he said they posed a potential threat to financial stability of the emerging economies.

Chidambaram foresaw many challenges before the capital markets and said every country should be prepared to meet the challenges of globalisation.

"Inflow and outflow of capital would continue to pose difficult problems. We have to live with some degree of volatility in the equity market, forex market and debt market irrespective of the level of capital account convertibility."

Chidambaram said one had to live with some degree of volatility in the equity, forex and debt markets irrespective of the level of capital account convertibility.

These challenges, including surging inflation and interest rates, posed a threat to financial stability of emerging economies due to disorderly adjustment of global macro-economic imbalances, he said.

Countries like the US and China are among those combating inflation.

The macro-economic imbalances were particularly with regard to fiscal and external current account deficits in the US, he said.

Elaborating on the challenges of capital markets, Chidambaram said there was a need to expand the investor base, particularly the retail base, through investor protection and education.

"We must assiduously work to enhance credibility by adhering to international best practices relating to all aspects of capital market activities."