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Thursday, November 22, 2007

RBI and Capital Inflows

From Bloomberg this morning:

India's central bank is yet to take a clear view on record capital flows, after the rupee gained the most in 33 years, Deputy Governor Rakesh Mohan said today.

India's best economic performance in 60 years led overseas investors to buy a record $18.6 billion in stocks and bonds this year. That's helped the rupee gain 12.3 percent since January and pushed the benchmark stock index above 20,000 points for the first time, leading to the imposition of some capital controls.

``We do intervene in the market, but we would like the exchange rate to be market determined,'' Mohan said in New Delhi.

India's finance ministry in August imposed curbs on companies seeking to borrow from overseas and the Securities & Exchange Board of India on Oct. 25 tightened rules on overseas investment in shares through so-called participatory notes.

The rupee surged as high as 39.185 against the dollar on Nov. 7, the highest intraday level since Feb. 20, 1998. It has retreated since and traded at 39.41 as of 10:45 a.m. in Mumbai, according to data compiled by Bloomberg.

India's central bank stepped up dollar purchases to prevent the rupee from gaining further and hurting exporters after it recorded the biggest annual gain in more than three decades.

Mohan said that while the central bank was successful in cooling down some sectors of the economy, it will use all instruments needed for its monetary policy objectives. The objectives of the policy are guided by financial and price stability, besides sustained growth.

`Unorthodox Approach'

``We have followed an unorthodox approach in the conduct of the monetary policy,'' Mohan said. ``We have succeeded in cooling down certain parts of the market. We will do whatever is necessary both upwards and downwards when the market situation demands.''

The Reserve Bank on Oct. 30 raised the ratio of deposits that lenders must put aside for the fourth time this year to curb inflation. The move helped inflation hold near a five-year low.

Wholesale prices rose 3.11 percent in the week ended Nov. 3 from a year earlier, compared with a 2.97 percent gain in the previous week, the government said last week.

India's exposure to the U.S. mortgage market has been small and the economy has so far been insulated from the subprime- mortgage crisis, Mohan said.

Losses from subprime mortgage foreclosures along with slower growth and falling house prices could reach as much as $300 billion, according to the Organization for Economic Cooperation and Development.

``Recent economic news points towards a more protracted economic adjustment,'' the OECD said in a report released in Paris. ``A recession in the U.S. is now seen as more likely than before by some observers.''