Mumbai: The Reserve Bank, now on a tightrope walk to contain inflation and manage the appreciating rupee, may succeed in restricting capital flows because of the global slowdown.
“As the risk appetite decreases globally, there could be a reduction in capital flows to India, which would make the task easier for RBI,” said BNP Paribas, Head of Market Economics Paul D. Mortimer-Lee.
The observation comes at a time when the RBI is tackling the appreciating rupee by buying dollars which in turn injects more liquidity into the system. On the other hand, it is in the process of sucking out liquidity from the system.
Pessimistic about global growth, Lee feels that the US Economy is in trouble and expects aggresive Fed rate cuts by about 0.5% in May-June.
Similarly, the Eurozone is likely to weaken as the consumption remains lacklustre while Japan has hit a soft patch and inflation has stopped rising.
Projecting a modest gross domestic product growth of 85% for India, BNP Paribas felt that money supply continued to be high and high inflation signalled overheating of the economy.
“There is overheating which is signalled by high inflation and even the money supply growth remains very high,” he said.
On the decision to ban the futures trading in wheat, Lee felt that he was unconvinced that high commodity prices was a result of speculation.
The prices on the futures market are a signal about the supply side pressures building up, he added.