Mumbai: Concerns of volatile capital inflows owing to interest rate differential are not as intense in India as in other emerging market economies due to the country’s large current account deficit, Reserve Bank of India (RBI) governor Duvvuri Subbarao said on Tuesday.
“In India’s case, the concerns on this account currently are less acute since capital inflows are needed to finance our current account deficit,” Subbarao said in a speech at the SNB-IMF Conference on The International Monetary System in Zurich.
“Yet even for us, the composition of the inflows remains an issue. About three-quarters of the current account deficit since 2009 has been financed by volatile capital inflows,” he said.
India’s current account deficit was at $9.7 billion in the December quarter, compared with a $12.2 billion deficit in the same period a year ago.
Some emerging economies are in a policy bind since rising inflation calls for tight monetary policy but higher interest rates will intensify volatile capital inflows following the second round of quantitative easing by the United States, he said.
Last week, the central bank stepped up its fight against rising prices, increasing interest rates by a bigger-than-expected 50 basis points (bps) and vowing to battle price pressures even at the cost of some economic growth.
China stormed back to post a hefty trade surplus in April as exports hit a record while imports eased more than expected, weighed down by sustained monetary tightening and high commodity prices.
The United States has claimed that the yuan, also called the renminbi, was undervalued and gave Chinese exports an unfair trade advantage.
In an apparent reference to China’s exchange rate policy, Subbarao said: “India’s (exchange rate) policy is subject to negative externalities from countries that maintain undervalued exchange rates, undermining our competitiveness in third markets and our efforts to contain the current account deficit.”
“In India’s case, the rupee’s exchange rate has been virtually flexible in the past two years, as we have not intervened in the foreign exchange market. The small increase in reserves reflects various accruals, interest earnings and valuation changes.”
The central bank chief also called for some enforcement mechanism on countries that create negative spillovers for the global economy.