The Reserve Bank of India (RBI) Governor, D. Subbarao, said that among the components of capital flows, India preferred long-term flows to short-term flows and non-debt flows to debt flows.

“The logic for that is self-evident. Our policy on equity flows has been quite liberal, and in sharp contrast to other EMEs (emerging market economies) which liberalised and then reversed the liberalisation when flows became volatile, our policy has been quite stable,” said Dr. Subbarao at the high level conference on “The international monetary system” jointly organised by the Swiss National Bank and the IMF in Zurich on Tuesday. He was speaking on ‘Volatility in capital flows: some perspectives'.

India has experienced both ‘floods' and ‘sudden stops' of capital flows. Net capital flows to India increased from as low as $7 billion in 1990-91 to $45 billion in 2006-07, and further to $107 billion during 2007-08, the year just before the crisis. They dropped to as low as $7 billion in 2008-09 at the height of the crisis. Capital flows are estimated to have recovered to around $50 billion in 2009-10.

Exchange rate policy

India's exchange rate policy is not guided by a fixed or pre-announced target or band, said Dr. Subbarao. “Our policy has been to intervene in the market to manage excessive volatility and disruptions to the macroeconomic situation. This ‘volatility centric approach' to exchange rate also stems from the source of volatility which is capital flows. Despite not having a fully open capital account, we have experienced large volatility in capital flows.”

India's exchange rate policy was said to have imposed some costs, said Dr. Subbarao, adding, that “Last fiscal (2009-10), the rupee appreciated by 13 per cent in nominal terms but by as much as 19 per cent in real terms because of the inflation differential between us and our trading partners.”

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