Capital inflows volatility not a problem: RBI

Low interest abroad is increasing flow

In a speech at the SNB-IMF Conference on The International Monetary System in Zurich, Subbarao said: “In India’s case, the concerns on this account currently are less acute since capital inflows are needed to finance our current account deficit.”

But the composition of the inflows remains an issue as about three-quarters of the current account deficit since 2009 has been financed by volatile capital inflows, Subbarao said. It may be noted that India’s current account deficit was at $9.7 billion in the December quarter as against a $12.2 billion in the same period a year ago.

Some emerging economies are in a policy bind since rising inflation calls for tight monetary policy but higher interest rates will intensify volatile capital inflows following the second round of quantitative easing by the United States, he said.

Last week, the RBI stepped up its fight against rising prices, by increasing interest rates by 50 basis points. China stormed back to post a hefty trade surplus in April as exports hit a record while imports eased more than expected, weighed down by sustained monetary tightening and high commodity prices.

The United States has claimed that the yuan, also called the renminbi, was undervalued and gave Chinese exports an unfair trade advantage. In an apparent reference to China’s exchange rate policy, Subbarao said: “India’s (exchange rate) policy is subject to negative externalities from countries that maintain undervalued exchange rates, undermining our competitiveness in third markets and our efforts to contain the current account deficit.”

“In India’s case, the rupee’s exchange rate has been virtually flexible in the past two years, as we have not intervened in the foreign exchange market. The small increase in reserves reflects various accruals, interest earnings and valuation changes.” RBI on Tuesday, also set up a committee for streamlining foreign exchange transactions and also invited comments from public and other stakeholders for improving facilities pertaining to investments and repatriation of funds.

In a statement it said that the committee chaired by former RBI Deputy Governor K J Udeshi was to simplify procedures for facilitating genuine foreign exchange transactions by individuals. The individuals are categorised into residents, non-resident Indians (NRIs), Persons of Indian Origin (PIOs) and expatriates employed in India under the Foreign Exchange Management Act (FEMA), 1999.