RBI Governor lists the other side of capital inflow

MATTERS OF POLICY: RBI Governor Y.V. Reddy (left) talks to Gen. (Retd) K.V. Krishna Rao, at a meeting in Hyderabad on Saturday.  

Special Correspondent

Y.V. Reddy says more capital might complicate management of monetary policy

HYDERABAD: The continuing foreign investments into the core sectors have reinforced the country's position as one of the fastest developing economies globally. But, these are also complicating the management of monetary policies. Lot of capital coming into the country may increase the value of rupee and this may result in lesser payments to exporters.

"While the markets will adjust to this situation, some companies may go bankrupt," Reserve Bank of India Governor Y. Venugopal Reddy has observed.

Delivering a lecture on "economies of the Asian countries and cooperation among the central banks" organised by Institute of Asian Studies here on Saturday, he said several aspects like capital flow, exchange rates, inflation and interests rates had to be efficiently managed to strike a balance. Comforts like trade and current account surplus, increasing foreign currency reserves and reduced external and domestic debts reinforced the economy's resilience to external shocks.

Though there was significant improvement in developing the local currency markets or bond markets, the market was dominated by multinationals whose behaviour depended on their global profits. On the emergence of Asian markets, he said they were in fact re-emerging after their share in the global output had declined over a period of time. The increasing integration of the Asian economies was evident from the significant rise in the trade between the countries.

Though there was strong demand for a common currency, the experiences after the introduction of Euro had to be studied and a social, political and economic consensus evolved before applying it to Asian economies.