Amid the rupee’s rising to two-year high last week, Reserve Bank on Sunday said it may intervene in the foreign exchange market if FII inflows are volatile. Foreign institutional investors (FII) have pumped a record USD 21 billion (Rs 96,000 crore) so far this year into Indian stock markets.
“If the inflows are lumpy and volatile or if they disrupt the macroeconomic situation, we will do so (intervene). Our intervention will be to keep liquidity conditions consistent with activity in the real economy and to maintain financial stability,” Reserve Bank Governor D V Subbarao said at a panel discussion in Washington.
He comments came on the heels of Finance Minister Pranab Mukherjee’s interview to a private television channel ruling out curbing FII inflows at present. However, RBI Deputy Governor Subir Gokarn had said the central bank could intervene in forex markets if capital surge leads to any disruptions.
Market regulator SEBI had last week exuded confidence that there would not be any reversal of foreign fund flows into equity markets as long as Indian economy is on a strong wicket. On sustained capital inflows, the rupee has been on a gaining spree for the past few trading sessions and had touched a 25-month high of 44.12 against a dollar last week.
Robust inflows had also pushed up the benchmark Sensex of Bombay Stock Exchange to over 20,000 level.
Speaking at discussion on ‘Role of Emerging Economies Going Forward and Key Policy Challenges’ at the International Monetary Fund, Mr Subbarao said many of the emerging market economies have intervened in the forex markets during recent times as inflows have increased.
“We have not despite receiving more portfolio inflows last month (September 2010) than in any other single month on record. The reason why we did not feel the need to intervene is because our absorption, driven by a widening current account deficit as imports have surged on the back of a positive outlook on growth and investment, has also increased,” he said.
The RBI governor added that financial stability would be the focus. India’s current account deficit, representing net flow of income out of the country barring capital movements, surged three-fold to $13.7 billion in the April-June quarter over the same period last year.
Mr Subbarao added that India’s economy was more susceptible to disruptions as capital inflows into the country are in excess of its economy’s absorption capacity, even as it continue to have a big current account deficit.
Emphasising upon the role of emerging market economies like India, the RBI Governor said such countries can continue to contribute for global development by maintaining their growth momentum. Mr Subbarao, however, said that the recent global economic crisis would require some reformulation by the emerging market economies.
“Going forward, the biggest challenge for the emerging market economies will be to pursue their growth and development strategies ion this evolving world of a ‘new normal’ growth and less welcoming of globalisation,” he said.
