The Reserve Bank of India (RBI) said on Tuesday that it may consider steps to control the flow of foreign funds, which has already pushed the rupee to a five-month high of R45 against the US dollar. The RBI’s statement comes less than 24 hours after Finance Minister Pranab Mukherjee on Monday said that there was no immediate need to interfere in the foreign exchange market or cap foreign portfolio inflows.
India is not alone among emerging markets stuck with a problem of plenty in inflows this year. Thailand and South Korea have also expressed similar concerns and Brazil on Monday doubled tax on foreign purchases of local bonds. Though India’s reaction may not be as adverse as Brazil’s, RBI has hinted that it was keeping all options open and that the rupee was being monitored very closely.
“It is becoming a larger global problem because of the imbalance that there is so much of liquidity and the returns are skewed towards emerging markets,” Subir Gokarn, deputy governor, RBI, said in Mumbai. “So it is emerging as a potential threat and we are clearly thinking of ways to deal with it. As long as the capital flows are in excess of the current account deficit the pressure to appreciate will continue.”
Overseas investors and portfoilo managers have bought as much as $19.7 billion (R88,098 crore) worth of equities this year and a third of them have been bought since the beginning of September alone. The rupee has reacted to this, rising from 47 per dollar on September 1 to 45 per dollar on Tuesday.
A stronger rupee could hurt export competitiveness, or make imports cheaper to the detriment of domestic industry or customs revenues as a share of import value.
Abheek Barua, chief economist at HDFC Bank told Hindustan Times said in the near term the rupee may trade in 44- 45 range to the US dollar.
“At this level there is an element of overvaluation building in, which may have some impact on the exports. There should be intervention by the Reserve Bank of India to check further strengthening in the rupee.”
Gokarn's remarks came as finance ministers and central bankers of the Group of Seven developed countries prepared to meet in Washington on Friday to discuss global currency issues.