High forex inflows concerns RBI

Written by Banking Bureau | Mumbai, Aug 30 | Updated: Aug 31 2007, 05:35am hrs
The Reserve Bank of India (RBI) has expressed concern over net capital flows as they have remained substantially above the current account deficit. This is likely to have an impact on the monetary policy and macroeconomic and financial stability.

Conceding that excess foreign exchange inflows was a concern for many countries, the report says that the monetary management at the current juncture in India was more complex than in other emerging market economies.

The apex bank cited three reasons behind the problem. First, domestic interest rates are higher than return on foreign exchange reserves, which leads to quasi-fiscal costs.

Second, although the fiscal deficit and public debt have declined in recent years, they still remain high by international standards. This restricts the flexibility available to fiscal policy to keep inflation relatively low.

Third, in India, the real sector has been liberalised over the years which constrains the ability to take administrative measures with regard to supply management, says the report. Commenting on the gradual deregularisation of the countrys banking system, it warns that the conduct of monetary policy is through the use of market-based instruments.