The Reserve Bank of India (RBI) today said emerging economies, including India, could legitimately impose capital controls in response to surges in capital flows.
"It is now broadly accepted that there could be circumstances in which capital controls can be a legitimate component of the policy response to surges in capital flows," RBI Governor D Subbarao said on the occasion of the 60th anniversary celebrations of Central Bank of Sri Lanka here.
Stimulus infusion by developed nation to tide-over global financial meltdown resulted in huge capital flows to emerging markets which offered better returns. However, the surge also led to problems such as currency appreciation and erosion of export competitiveness.
Foreign fund flows into Indian capital market including debt was to the tune of $39.4 billion, while equities alone attracted investment of $29.3 billion during 2010.
During the current year, foreign investors have parked $1.6 billion in the both equities and debt market of India.
However, so far Indian monetary authorities have not put any restriction on capital inflows.
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"The push factors are the easy monetary policies of advanced economies which create the capital that flows into the EMEs (Emerging Market Economies). What this says is that international capital flows comprise a structural component and a cyclical component. It is the cyclical component that typically disrupts the macroeconomic stability of EMEs," he said.
EMEs have dealt with the problem of excess flows in diverse ways depending on their macroeconomic situation. This has broadly taken one of several forms: controlling capital at entry, taxing it on entry or intervention in the forex market, he said.
Managing capital flows should not be treated as an exclusive problem of EMEs. In as much as lumpy and volatile flows are a spillover from policy choices of advanced economies, the burden of adjustment has to be shared.
Subbarao said, "Managing currency tensions will require a shared understanding on keeping exchange rates aligned to economic fundamentals, and an agreement that currency interventions should be resorted to not as an instrument of trade policy but only to manage disruptions to macroeconomic stability."