Mumbai: Large capital inflows could result in overvaluation of India’s currency and erode competitiveness of traditional and goods sectors in the long term, India’s deputy central bank governor said on Thursday.
Deputy Governor Rakesh Mohan, in a paper for a Bank of France seminar in Paris posted on the Indian central bank’s Web site www.rbi.org.in, said large remittances and a sustained spurt in software exports were complicating exchange rate management.
“(These) coupled with capital inflows have the potential for possible overvaluation of the currency and the resultant erosion of long-term competitiveness of other traditional and goods sectors,” Mohan said.
India is part of the way through a three-phase, five-year plan towards greater capital account convertibility.
Mohan said opening up the capital account meant market participants needed to be better able to absorb greater volatility and shocks.
“In the context of progress towards further capital account convertibility, the market participants are going to be faced with increased risks on multiple accounts: volatility in capital flows, volatility in asset prices, increased contagion and state of ability of legacy institutions in managing risks.”