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RBI rules out imminent steps to curb forex inflows
November, 03rd 2010

The Reserve Bank on Tuesday ruled out any imminent intervention in the foreign exchange market, saying capital inflows are still not lumpy and volatile.

"Capital inflows have not reached an alarming level as it had happened in 2007 and therefore there is no room for immediate action by the Reserve Bank," RBI Governor Duvvuri Subbarao told newsmen during his customary post-policy press conference here.

Earlier in the day, RBI upped the key policy rates or short term lending (repo) and borrowing (reverse repo) rates by 25 basis points each to 6.25 and 5.25 per cent respectively, to rein in inflationary expectations, while leaving the cash reserve ratio unchanged at six per cent.

To a question on what is the threshold level of capital inflow to which RBI is comfortable, Subbarao said, "There is no comfort level as such. Overall, so far it has been roughly in line with our expectations.

But in 2007 and 2008, capital flows had reached around over nine per cent of GDP when current account deficit was only around one per cent of GDP."

While a record $24 billion FIIs poured in in the equities market this year so far, the increased forex also helped in financing of current account deficit, which widened to 3.6 per cent of GDP in the first quarter of the financial year.

However, the Governor warned of possible intervention if these inflows become unmanageable.

"Large capital flows beyond the absorptive capacity of the economy could pose a major challenge for exchange rate and monetary management," he said.

He added: "Given the weak recovery, some advanced economies are in the process of resorting to another round of quantitative easing that could trigger capital flows into emerging markets, including ours."

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