No immediate steps to stem capital flows, say economists

MUMBAI: India may not impose capital controls immediately in the near-term and may prefer to adopt a calibrated approach and act only after assessing the impact of the deluge of foreign exchange inflows that are expected to hit the market in the coming days.

Though India is expected to take some measure to stem capital inflows that could result in further appreciation of the rupee, it is unlikely to act in a hurry, according to economists.

“Relative to others, India is fairly well protected,” said David Carbon, managing director of Currency and Economic Research, DBS. With prospects of another round of quantitative easing, many Asian economies are expected to act towards stemming the flows to their respective economies. Already, some emerging economies like Brazil and Thailand have started closing their doors to foreign capital . The Indian rupee has appreciated only about 4% (year to date) against the dollar compared with 9% in Malaysia and Thailand.

“What is different for India against other Asian peers is a current account deficit. India is the only economy in the region that runs a current account deficit while others run surplus. On a positive note, this could help absorb some inflows and to an extent help manage the deluge of inflows,” said Mr Carbon. He added that “in relative terms too, inflows in India (as % of GDP) are low compared to other small Asian economies.”

“We expect any capital account liberalisation in India will proceed in a very calibrated manner, though the bias will likely be in encouraging more inflows,, ” said a Citigroup note .

After India recently liberalised FII limits on bonds last month, there could be some tightening, given the size of portfolio inflows. These could be through tightening of ECB norms in terms of spread/ tenor as well as end-use , lower interest rates on NRI deposits and reversing norms regarding banking capital to pre-crisis levels. Banks may be allowed to borrow funds from overseas branches up to 25% of their Tier -I capital.