India is witnessing an “avalanche” of capital flows as central banks around the world are reducing interest rates to very low levels but the RBI is unable to cut interest rates very quickly due to “high” inflation, Governor Raghuram Rajan said today.
To deal with the global financial crisis, many central banks around the world are printing money and reducing interest rates to very low levels. With countries like India offering high interest rates, significant foreign inflows have been witnessed in debt.
“A lot of that money is coming to us. We have got an avalanche of capital inflows.
“Our problem is: we also have high inflation, we cannot cut interest rates very quickly to the bone in order to tell those countries — don’t come here expecting high interest rates,” the RBI Governor said, addressing the students of Guru Nanak College in central Mumbai this morning.
The RBI has faced pressure from the industry and the government to cut rates to boost growth. In the 6th bi-monthly Monetary Policy Review announced on February 3, Rajan had kept the key policy (repo) rate unchanged at 7.75 per cent. Rajan had, however, surprised markets by effecting a 25 basis point cut in January, ahead of the policy.
The RBI has in an agreement with government committed to using monetary tools to cut inflation to pre-decided levels.
The Monetary Policy Framework Agreement binds Reserve Bank of India (RBI) to using monetary policy tools including fixation of interest rates, to bring down inflation to less than 6 per cent by January 2016 and to around 4 per cent by March next year.
Foreign investors poured in over Rs 24,500 crore in Indian capital markets last month and analysts expect the inflows to rise after the Union Budget sought to address concerns on controversial issues like GAAR and retrospective taxation.
In January, overseas investors had pumped in Rs 33,688 crore in Indian debt and equities.
In 2014, the net investment by overseas investors in debt markets was Rs 1.59 lakh crore, while the figure for equities stood at Rs 97,054 crore. Overall net investment by foreign investors stood at Rs 2.56 lakh crore last year.
Rajan said high capital inflows have their own problems and warned that if a situation of currency depreciation were to arise, there can be problems for companies who have not hedged.
The rupee plumbed new depths against the dollar on almost a daily basis in July-August 2013 and hit lifetime low of 68.85 on August 28. After the RBI and the government took steps to curb the rupee depreciation, the rupee stabilised and it currently trades at 61.9 levels.