India may Intervene to check Forex Inflows.

NEW DELHI: India’s central bank vowed on Saturday to intervene in the foreign exchange market if its currency became “too volatile” or “threatened to disrupt” the macroeconomic situation of the country.

The move came as India’s foreign exchange reserve increased by $2.563 billion to $294.158 billion for the week ended October 1, gaining for the third straight week on account of revaluation.

Foreign currency reserve also rose by $1.978 billion to $266.507 billion during the week, according to the Reserve Bank of India’s (RBI) weekly statistical supplement.

“Our intervention will be to keep liquidity conditions consistent with activity in the real economy and to maintain financial stability,” said India’s central bank Governor Duvvuri Subbarao. “And not to stand against developments driven by changing economic fundamentals.”

Last week, the RBI said it will avoid intervening in the foreign-exchange market for the 11th consecutive month as the relative strength of the rupee, Asia’s second best-performer in September, helped curb inflation.

The Indian rupee, which gained five percent against the dollar in September to become Asia’s best performer, was boosted by fund flows from foreign institutional investors (FIIs) that crossed the record $22.05 billion mark this year. Of the total FIIs, $5.43 billion were flowed in during September alone.

“In recent months, when inflows have swamped most emerging market economies, several central banks have intervened in the forex markets,” Subbarao was quoted as saying after attending a seminar on emerging markets hosted by the International Monetary Fund in Washington.

“The reason we did not feel the need to intervene is because our absorption, driven by a widening current-account deficit as imports have surged on the back of a positive outlook on growth and investment has also increased,” he added.

Such statements hint that though policymakers have zeroed in on such inflows and the potential threat of asset-price bubbles, intervention or any form of capital controls to rein in the rupee is unlikely in the near future.

With the rupee’s gains largely reflecting a broadly weakening dollar, intervention would likely prove ineffective at this stage.

The rupee’s rise, as measured by the real effective exchange rate, has lagged its export counterpart in South Asian and North Asian between January and August, according to Bank of International Settlements data.

Indian Finance Minister Pranab Mukherjee also played down the talks of possible capital controls, saying that capital inflows have not affected the market sentiment.

“India is not contemplating any restrictions on foreign institutional investment (FII) and foreign direct investment at this point of time,” he added

Inflation is yet another reason why the RBI may take it easy on the rupee. Consumer prices remain high, with headline inflation at 8.5 percent on-year in August; a higher rupee will provide some relief to policymakers as it cuts into imported inflation.

The Indian government may not intend to harm foreign investor sentiment, particularly when it needs the inflows to narrow down the current-account deficit. The April-June gap stood at $13.7 billion.

According to an Institute of International Finance report, private sector investments in emerging markets, which includes India and China, is projected to touch a whopping $825 billion, mainly spurred by strong growth.

Source : arabnews.com