Deja vu: RBI faces problem of plenty, exit dilemma
A problem of plenty faced during the earlier bull market has returned to haunt the Reserve Bank of India (RBI).
By ET Bureau |
MUMBAI: A problem of plenty faced during the earlier bull market has returned to haunt the Reserve Bank of India (RBI). A surge in capital inflows has been listed by the central bank as one of its key concerns. The other concerns faced by RBI is the dilemma over an early exit from the accommodative monetary policy and of rate cuts not being passed to borrowers.
Addressing the G-30 International Banking Seminar in Istanbul on Monday, organised on the occasion of the IMF-World Bank annual meetings, RBI governor D Subbarao said: ���Risk appetite is now returning. Portfolio investments by FIIs in the Indian equity market amounted to $13.6 billion in April 1-September 18, 2009 as against outflows of $5.2 billion in the corresponding period of 2008 reflecting a turnaround of almost $19 billion.���
Managing this huge inflow was a bigger headache, now considering that the threat of inflation had worsened and sterilising the inflows would add to the already burgeoning fiscal deficit. Mr Subbarao said inflation was a concern because the monsoon has been the weakest since ���72.
���Emerging market central banks have three options in managing capital flows. The first option for the central bank is not to intervene in the forex market and let the exchange rate bear the burden of adjustment. Will undue exchange rate appreciation not further widen the current account and what will the implications be for future sustainability? Will exchange rate appreciation help to contain inflation? These are the questions to address if this option is adopted,��� said Mr Subbarao.
He said if the RBI intervened but did not sterilise, the resultant liquidity would stoke inflation further and fuel another credit and investment boom, leading to financial fragility. ���The third option is to sterilise interventions.
Irrespective of the method of sterilisation , the financial cost in terms of national balance sheet is obviously ultimately borne by the government even though direct costs may be borne by separate agencies. Sterilised intervention can exacerbate fiscal pressures, but this needs to be assessed against the benefits of macrofinancial stability.���
Mr Subbarao said the government needs to ���work seriously��� on cutting expenditure. He has warned that the government cannot sit back and expect higher tax revenues to balance the budget on their own.
Addressing the G-30 International Banking Seminar in Istanbul on Monday, organised on the occasion of the IMF-World Bank annual meetings, RBI governor D Subbarao said: ���Risk appetite is now returning. Portfolio investments by FIIs in the Indian equity market amounted to $13.6 billion in April 1-September 18, 2009 as against outflows of $5.2 billion in the corresponding period of 2008 reflecting a turnaround of almost $19 billion.���
Managing this huge inflow was a bigger headache, now considering that the threat of inflation had worsened and sterilising the inflows would add to the already burgeoning fiscal deficit. Mr Subbarao said inflation was a concern because the monsoon has been the weakest since ���72.
���Emerging market central banks have three options in managing capital flows. The first option for the central bank is not to intervene in the forex market and let the exchange rate bear the burden of adjustment. Will undue exchange rate appreciation not further widen the current account and what will the implications be for future sustainability? Will exchange rate appreciation help to contain inflation? These are the questions to address if this option is adopted,��� said Mr Subbarao.
He said if the RBI intervened but did not sterilise, the resultant liquidity would stoke inflation further and fuel another credit and investment boom, leading to financial fragility. ���The third option is to sterilise interventions.
Irrespective of the method of sterilisation , the financial cost in terms of national balance sheet is obviously ultimately borne by the government even though direct costs may be borne by separate agencies. Sterilised intervention can exacerbate fiscal pressures, but this needs to be assessed against the benefits of macrofinancial stability.���
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Mr Subbarao said the government needs to ���work seriously��� on cutting expenditure. He has warned that the government cannot sit back and expect higher tax revenues to balance the budget on their own.
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