RBI prefers FDIs over short-term debt inflows to finance CAD

MUMBAI: The Reserve Bank today said it prefers long-term foreign direct investment (FDI) inflows over short-term debts as the former is more stable in nature and also helps in financing the comparatively large current account deficit of the country.

"We prefer long-term equity flow into the country in the form of FDIs. Debt flows, particularly short-term debt flows, are not the preferred form of money flows," deputy governor Subir Gokarn said here today.

He was speaking at the 12th L K Jha memorial lecture titled 'Global financial flows, global imbalances and crises' which was delivered by Prof Maurice Obstfeld of the University of California at Berkeley. The function was presided over by the Governor Duvvuri Subbarao.

The late Jha was the RBI governor from July 1967 to May 1970 and was also a member of the Brandt Commission that probed the financial crisis of the developing economies in 1983.

Referring to the significance of maintaining a lower current account deficit (CAD), Gokarn said the country is far from any threshold of vulnerability on account of CAD, which currently stands at close to 3 percent of the GDP.

He, however, said it is crucial to see how the CAD is financed to understand the possibility of instability for the economy and not the threshold per se.