Reserve Bank of India governor Duvvuri Subbarao prefers the calibrated approach to tightening monetary policy. The central bank, he says, is watching the appreciation of the Indian currency. In a conversation with Shobhana Subramanian, Subbarao says the RBI is not looking at a Tobin tax on capital flows for now.

How are you reading the appreciation of the rupee?

We are watching the exchange rate both in nominal and real terms. There is a view that letting the rupee appreciate is an anti-inflationary measure, but that is not correct, that is not our policy. Besides, the pass through from exchange rate to inflation is not significant. We do not target a specific rate or band and will intervene only in order to manage volatility and ensure there is no disruption to the macro situation.

Would you at all consider a tax on capital inflows?

That question of whether we would impose a Tobin tax has been debated. It is important to recognise that we have traditionally used both price and quantity measures to manage capital flows. It is not as if the imposition of a Tobin tax will signal a shift of the RBI?s stance; even now we used price-based measures for NRI deposits or ECBs. We?re not at the moment considering a Tobin tax for all the standard reasons that it is difficult to design and administer and also most important that it is distortionary. But it is not off the table, when necessary we might resort to it.

Are you comfortable with the level of capital inflows?

We can?t say we are comfortable with the capital flows. The BoP numbers, which are not in public domain yet, show that last year flows were modestly in excess. There are various estimates about flows this year; some people say they may exceed our absorptive capacity like it happened in 2007.

Would you consider raising the FII limit for corporate bonds or gilts?

It?s fair you ask the question, but it would be inappropriate for me to answer that. We were expecting some measures with regard to real estate?Yes, I believe, there were some expectations. We?ve raised the provisioning norms in the October credit policy and we?ve consulted with commercial real estate associations. We?ve also looked at the numbers and our tightening of provisioning norms has had an impact on restraining bank exposure to the real estate sector. And we?re watching this. Somewhere down the line we may take action, I don?t know, but we didn?t consider it necessary to take any action as part of this policy. There is some build-up in asset prices but I wouldn?t call it a bubble.

With China not revaluing the renminbi, won?t India become uncompetitive?

Yes, China is a major economy and its share of the world trade is going up and the exchange rate of the renminbi has not moved in the last several years. So, if some countries do not let their exchange rates adjust to that situation and others have a flexible policy, it would impact those countries that have a flexible policy. So, what other countries do have an impact on our external sector and macro economy.

What?s your view on the FSDC?

The finance minister has defined the mandate of the FSDC in the Budget and has said that they will put out a discussion paper and we have had some discussions on this. The FM said in public that the FSDC will add value and will not replicate what is being done by other existing structure.

Do you think the HLCC, which is chaired by the RBI governor, be given executive powers?

That?s a good question. I believe there are different regulatory models and the efficacy of a model should be judged by whether it can meet most of the contingencies. No regulatory model will meet all the contingencies. All regulatory models were tested after the crisis. We have our own system of regulators and I don?t believe HLCC should have executive powers because that means we would have to be accountable to Parliament. I don?t think the HLCC is fine as it is, it?s got to refine its working, as the FSDC comes we need to set our boundary lines. I must confess you?ve taken me by surprise, it?s not a question I?ve thought through completely. But you must remember that even a body with executive powers could not have solved the legal issues.