Posted on Friday, 12th February 2010 by Admin
Amidst concerns that volatile foreign fund inflows could lead to disruptions in the economy, Reserve Bank of India today hinted that it may take steps to tame these flows.
Speaking at a conference here, Reserve Bank Governor Subbarao said the central bank’s approach to prevent excessive capital flows would be calibrated so as not to impact growth and spur inflationary pressures.
Referring to emerging market economies (EMEs) including India, Subbarao said, excessive volatile capital flows could test the policy skills of central banks in emerging economies.
“Managing these flows, especially if they are volatile, is going to test the effectiveness of central bank policies of semi-open EMEs…capital flows can also potentially impair financial stability,” Subbarao said.
Subbarao said apex banks in the EMEs face the dilemma of managing the fund flows without putting pressure on the exchange rates in the respective economies.
While central banks staying away from the forex market could result in currency appreciation unrelated to fundamentals, their intervention could lead to potential inflationary pressures,” Subbarao said.
At the same time, if the central banks take measures to sterilize the excess liquidity, it could cause the risk of pushing up interest rates, which will hurt the growth prospects, he said.
“How EMEs manage the impossible trinity – the impossibility of having an open capital account, a fixed exchange rate and independent monetary policy – is going to have an impact on their prospects for growth, price stability and financial stability,” he said.
In the face of increasing globalization, the challenge for central banks is to better understand the interplay of global factors and domestic variables and factor that into their policy calculus, he said.
RBI Deputy governor Shyamala Gopinath also sounded cautious on capital flows when she said the central bank is cautious to avert a possible impact of volatile capital flows in the economy.
“There is a limit upto which the excessive capital flows can be absorbed (in the emerging markets)…we would not like to see high volatile capital flows,” Gopinath said while co-chairing a panel discussion.
Foreign institutional inivestment during the year 2009 rose to $17 billion while the investment in debt instruments was little over one billion dollar as per the data on the Sebi website.
However, so far in 2010 the investments in debts by FIIs has crossed $2.5 billion.
Another RBI Deputy Governor, K C Chakrabarty had recently said that the current level of capital flows to the country did not pose any major concern to the regulator as it can be absorbed by the market.
“Up till now capital flows are managed by the market. We feel that there is no problem to manage this kind of capital flows,” Chakrabarty had said.
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