Reserve Bank of India governor Raghuram Rajan on Tuesday cautioned over reliance on overseas fund inflows and said that caps on foreign institutional investors’ investments in debt should be continued.
“We are limiting our reliance on foreign debt. It is important we keep it this way and manage the economy in a way that is careful and that is circumspect,” Rajan said in an address at the Somaiya College’s foundation day.
In July, the RBI had increased FII limit in government bonds for medium-term investors by $5 billion to $25 billion, as FIIs who mostly take positions in Indian debt maturing between 1-3 years, had exhausted almost all of their investment limit of $20 billion. At the same time, it had reduced the investment limit for long-term investors from $10 billion to $5 billion, thus leaving the total FII investment cap at $30 billion.
Rajan also said that though the country has benefited from foreign fund flows, these cannot be taken for granted.
“We have to be careful about this money because if we say, ‘this is wonderful, they all like us, we follow tremendous policies and that’s why we got this money’, and we go and spend, we run large current account deficits based on these foreign borrowings,” he said.
At some point of time, these investors would find greater usage of their money in home markets and so go out once again, he added.