Capital controls do not work and increases costs, especially for small firms, according to Joshua Felman, senior resident representative of the International Monetary Fund in India.
Speaking at a forum organised by the Bombay Chamber of Commerce & Industry (BCCI) in the city on ?Managing Capital Inflows: Challenges & Opportunities?, Felman said the sterlisation methodology of the local currency is not a permanent solution and that there was no single solution to manage capital inflows.
There is a need for innovative tools to tackle the dynamic changes occurring in the economy and conventional methods may work in the short run, he said.
On the impact of capital inflows, Felman said that they accelerate domestic demands and current account deteriorates. Growth tends to rise during these episodes but falls afterwards, said
Felman.
Single door entry to foreign investment is a root cause of high pressure building up in the equity market according to Mohan Shenoi, treasurer at Kotak Mahindra Bank Ltd.
He suggested extending this entry through different options, including the commodity market, to diffuse excess funds.
His argument was based on the fact that all funds seek solace in the equity market as interest rates and forex hedging can be done through the process of trading in equities.
The concern was that of liquidity caused by the appreciating rupee and intervention of the Reserve Bank of India in the forex market to prevent sharp appreciation of the currency.
Rajiv Lall, vice president of BCCI in his address, was of the view that the authorities should target exchange rate than inflation.
Lall, who is also the managing director and chief executive officer of IDFC Ltd said sterilisation, as a policy rule, is an effective tool after weighing the fiscal costs that accompanies them.
DK Joshi, an economist at Crisil, clarified that there was little evidence to show that exports have been adversely affected due to rupee appreciation against the dollar. The solution, according to him was, provision of export sops and hedging against currency movements.
There was a strong case for India to move towards capital account convertibility, opined Shubhada Rao, chief economist at Yes Bank. Rao was of the view that the RBI?s market stabilisation scheme to mop up excess liquidity had its limitations and was not a long term solution.