Amid fears that further liquidity injection by the US central bank would add to capital inflows, Chief Economic Adviser Kaushik Basu on Thursday said India had large capacity to handle these funds, but should keep all its options open in case the situation turns alarming.
Dr Basu told reporters in New Delhi that current capital controls should not be stepped up because record fund flows by financial institutional investors (FIIs) have not become a matter of concern as yet. Speaking on the sidelines of a United Nation’s Development Programme event, he also attributed the surge in capital inflows to confidence that foreign investors repose in Indian economy.
“India already has a bunch of capital controls, so I am not personally in favour of stepping up on those and as one of the deputy governors of RBI has pointed out, the inflows that we are getting into the country are large but still not at a level that we are worried about,” Dr Basu said.
“Instability being caused by inflows of foreign exchange through the FII route that we have got from the April 1 to today is bigger than ever in India’s history, but India is a much stronger economy today and so we should be able to take it,” he added.
The remarks assume importance in the wake of US Federal Reserve’s move to purchase a further USD 600 billion of government bonds, that will pump liquidity into the system. Though the Fed plans to buy these securities by second quarter of 2011, the announcement itself leads to some reaction.
“While it is true that some of the money coming into India is because of loose monetary policy being followed in the United States and some other industrialised nations, a part of the money is also coming in because of confidence in India’s ability to grow and make use of the money,” Dr Basu said.
He said that India has to keep all options on the table to handle the flows in case there is a surge of volatility. “But, right now I would not use any of those,” he added.
FIIs have poured 26.46 billion dollars into equity and 9 billion dollars in debt markets in India so far this year.
India has some control, particularly in debt markets. FIIs can invest up to USD 20 billion in corporate bonds and USD 10 billion in government bonds at any point of time. Besides, RBI can intervene in the forex market to stem the rise in the value of rupee. The rupee has appreciated over 5 per cent against dollar since September.
However, RBI Governor D Subbarao on Tuesday had ruled out any imminent intervention in the foreign exchange market, saying capital inflows are still not lumpy and volatile.