Bankers and economists expect that after the Securities & Exchange Board of India (Sebi), it is now the turn of the Reserve Bank of India (RBI) to address the issue of the huge capital flow to the country. They expect RBI, which had earlier taken some measures to encourage capital outflows would go for major moves on the same front in its forthcoming mid-term review of the Annual Monetary Policy on October 30.
Bankers refer to the union finance Minister P Chidambaram?s statement to justify such an expectation. Chidambaram, in a statement, has said, ?Without hurting investments, we would like to take some measures to moderate the sharp increase inflows. Some measures have been taken by Sebi.?? Says Rohini Malkani, economist, Citi, ?Sebi’s proposed measures will have a negative impact on temporary flows and result in near-term hiccups to currency. However, on a longer term basis, we are unlikely to see a reversal to the rupee appreciation story.?
Some of the domestic factors supporting this appreciation view are: India?s strong growth story, the size, composition and financing of its current account deficit, while rupee positive factors on the international side are dollar weakness and renminbi appreciation, says Malkani.
Agreeing with Malkani, Ajay Mahahan, president, Yes bank, who had attended the IMF-World Bank meet last week in the US, comments that the international investors are highly bullish on their future investment plans for India and China. ?High capital flows are irreversible and the authorities need out-of-the-box thinking to manage the situation. Looking at the forex reserve position of around $260 billion, I expect achieving capital account convertibility would be matter of another 15-18 months,? he said. As immediate measures for capital outflow, RBI should allow bigger overseas purchasing and investment capacity for Indians, he suggested. While the RBI has already hiked the ceiling on the issuance of the market stabilisation scheme (MSS) if the surge in dollar inflows continues, Citi expects to see a further hike in the MSS ceiling, sell-buy swaps, and a CRR hike to neutralize the cost of sterilization, says Malkani.
Economist Ajay Shah says the country, on an average, has recorded $100 billion worth of capital inflows and outflows on the capital and current accounts in recent times and is in a position go for large measures to achieve capital account convertibility without fearing any backlash. After discounting the P-Note issue impact on capital inflows, the market is now eagerly waiting for the outcomes of the RBI meeting, on October 30 and the Federal Reserve meet on October 31. What the two central banks do will have a bearing on the Indian markets, observe bankers.