RBI hints at curbs on capital inflows
Economic Times, February 2, 2010, Page 1
Calls For Measures To Avoid Stark Economic Imbalances
Our Bureau MUMBAI
RBI governor Duvvuri Subbarao has for the first time said the nation “may have to take some measures towards capital control” in the short term to avoid stark economic imbalances after acknowledging in the past the role played by fund flows in worsening inflation, boosting asset prices and destroying industry competitiveness.
The governor has laid the foundation for possible action by drawing attention to the fact that most emerging markets face unprecedented flows that are pushing up commodity prices, asset prices and disturbing exchange rates to the disadvantage of local industry.
“All emerging market economies now believe that capital inflows will increase in the months ahead,” Mr Subbarao said in a teleconference on Monday, the first such event in RBI’s history. “If that happens, based on India’s growth prospects, it is possible that the inflows will be much beyond our current account deficit. In the medium term, it is our objective that India expand its capacity to absorb capital flows, but in the short term, should there be flows largely in excess of our current account deficit... we may have to take some measures towards capital control.”
The RBI governor and the government have been preparing the ground for some kind of action on capital inflows for some time now as $17 billion of funds flowing into Indian equities last year pushed up the rupee over 10% since March-end, making Indian exports lose out to Chinese rivals.
Tide seems to be turning
SOARING prices, mainly in real estate, are partly due to inflows.
The prospects of more than 8% GDP growth and government bond yields nudging 8% at a time when rates continue to be near-zero in developed markets are luring global funds. Finance secretary Ashok Chawla and Mr Subbarao in the past have acknowledged the potential problems due to inflows, but maintained that there was no cause for concern.
Now the tide seems to be turning.
“An implicit premise in the latest monetary policy announced by RBI is higher capital flows into India and the need to actively intervene in the markets; this has a bearing for liquidity in the local markets and hence we expect the central bank to be actively managing liquidity with an eye on the emerging capital flow situation,” said Hemant Mishr, head of global markets-South Asia at Standard Chartered Bank.
The central bank has been changing gears. “The endeavour in the EMEs will be to strengthen the recovery process without compromising on price stability and to contain asset price inflation stemming from large capital inflows,” RBI said in its economic review released on Thursday. It followed up with the same assertion while reviewing the monetary policy the next day saying, “sharp increase in capital inflows, above the absorptive capacity of the economy, may complicate exchange rate and monetary management”.
Although inflows have caused problems for policymakers in the past, it is a taboo to publicly state that they may be curbed. This is probably the first time since January 2005 that the RBI governor is talking about some measures to control capital flows. In 2005, governor YV Reddy had in a veiled manner suggested containing inflows, but later clarified he did not mean that. But recently, countries such as Taiwan and Brasil in a limited way have imposed what is popularly known, but disliked by many, as the Tobin Tax—a tax on a transaction to deter speculation. “What’s clear from the governor’s comments is that he is worried about higher government borrowing pushing up yields, which in turn could attract more capital,” said the head of treasury with a foreign bank.
There may not be a tax, or a blunt measure straightaway, but tinkering with many instruments as it has done in the past such as capping interest on NRI deposits, limiting foreign investment in corporate and sovereign debt, and directing the end use of funds raised overseas.
But the governor said he hasn’t made up his mind on which stick to beat with. “We will look at all those measures and also at what other emerging market economies are doing. We will learn from their experience,” he said.
Economic Times, February 2, 2010, Page 1
Calls For Measures To Avoid Stark Economic Imbalances
Our Bureau MUMBAI
RBI governor Duvvuri Subbarao has for the first time said the nation “may have to take some measures towards capital control” in the short term to avoid stark economic imbalances after acknowledging in the past the role played by fund flows in worsening inflation, boosting asset prices and destroying industry competitiveness.
The governor has laid the foundation for possible action by drawing attention to the fact that most emerging markets face unprecedented flows that are pushing up commodity prices, asset prices and disturbing exchange rates to the disadvantage of local industry.
“All emerging market economies now believe that capital inflows will increase in the months ahead,” Mr Subbarao said in a teleconference on Monday, the first such event in RBI’s history. “If that happens, based on India’s growth prospects, it is possible that the inflows will be much beyond our current account deficit. In the medium term, it is our objective that India expand its capacity to absorb capital flows, but in the short term, should there be flows largely in excess of our current account deficit... we may have to take some measures towards capital control.”
The RBI governor and the government have been preparing the ground for some kind of action on capital inflows for some time now as $17 billion of funds flowing into Indian equities last year pushed up the rupee over 10% since March-end, making Indian exports lose out to Chinese rivals.
Tide seems to be turning
SOARING prices, mainly in real estate, are partly due to inflows.
The prospects of more than 8% GDP growth and government bond yields nudging 8% at a time when rates continue to be near-zero in developed markets are luring global funds. Finance secretary Ashok Chawla and Mr Subbarao in the past have acknowledged the potential problems due to inflows, but maintained that there was no cause for concern.
Now the tide seems to be turning.
“An implicit premise in the latest monetary policy announced by RBI is higher capital flows into India and the need to actively intervene in the markets; this has a bearing for liquidity in the local markets and hence we expect the central bank to be actively managing liquidity with an eye on the emerging capital flow situation,” said Hemant Mishr, head of global markets-South Asia at Standard Chartered Bank.
The central bank has been changing gears. “The endeavour in the EMEs will be to strengthen the recovery process without compromising on price stability and to contain asset price inflation stemming from large capital inflows,” RBI said in its economic review released on Thursday. It followed up with the same assertion while reviewing the monetary policy the next day saying, “sharp increase in capital inflows, above the absorptive capacity of the economy, may complicate exchange rate and monetary management”.
Although inflows have caused problems for policymakers in the past, it is a taboo to publicly state that they may be curbed. This is probably the first time since January 2005 that the RBI governor is talking about some measures to control capital flows. In 2005, governor YV Reddy had in a veiled manner suggested containing inflows, but later clarified he did not mean that. But recently, countries such as Taiwan and Brasil in a limited way have imposed what is popularly known, but disliked by many, as the Tobin Tax—a tax on a transaction to deter speculation. “What’s clear from the governor’s comments is that he is worried about higher government borrowing pushing up yields, which in turn could attract more capital,” said the head of treasury with a foreign bank.
There may not be a tax, or a blunt measure straightaway, but tinkering with many instruments as it has done in the past such as capping interest on NRI deposits, limiting foreign investment in corporate and sovereign debt, and directing the end use of funds raised overseas.
But the governor said he hasn’t made up his mind on which stick to beat with. “We will look at all those measures and also at what other emerging market economies are doing. We will learn from their experience,” he said.
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