We want to curb Re volatility, says Mohan

Reserve Bank of India Deputy Governor Rakesh Mohan said policy makers aim to limit swings in the rupee's exchange rate to help protect small businesses.

``We want to curb the volatility in the exchange rate,'' Mohan said in an interview in Jackson Hole, Wyoming, where he is attending the Federal Reserve Bank of Kansas City's annual economic symposium. India is coping with a record influx of capital that puts pressure on the rupee to appreciate.

A strengthening exchange rate makes the country's exports less competitive on world markets. Volatility in the currency also threatens smaller companies less able to withstand risk, Mohan said. He stressed that policy makers' aim isn't to target a level for the rupee.

"We'd like the exchange rate to be market-determined, even though we intervene on a regular basis,'' Mohan said. The central bank buys and sells foreign currencies, ``so smaller producers don't get affected as much by the volatility,'' he said.

India is the world's second-fastest growing major economy, after China, and exports make up one-third of its $854 billion gross domestic product.

Mohan also said India must take measures to guard against the inflationary pressures of record capital flows from abroad. Foreign direct investment into India more than doubled to $19.5 billion in the year ended March 31, central bank figures show.

Capital flows into the stock market reached a net $5.9 billion in July, a record, according to the Securities and Exchange Board of India.

Controlling Flows

In an attempt to control the inflows, India earlier this month said companies borrowing more than $20 million overseas may not bring the funds into the country.

"We have had to cope with excess liquidity,'' and the capital inflows have led to ``money supply running somewhat higher,'' Mohan said. ``Given our concern with both price stability and financial stability, we do need to temper these flows'' from overseas.

There's no need for Indian companies to borrow abroad because ``we have adequate liquidity domestically,'' Mohan said. ``To maintain an independent domestic monetary policy you have to have some kind of capital-account control, and that's exactly what we're doing.''

Authorities have allowed the rupee to appreciate 8.2 per cent against the dollar so far this year. India's central bank ``doesn't take a view on the value, or the level, of the exchange rate,'' and has maintained a consistent policy for the past ten to 12 years, Mohan said.

The country's banks face no risk from the rout in the U.S. subprime-mortgage market, Mohan also said. ``I don't think we're much affected, because our financial institutions, our banks, don't really have exposure to these markets,'' he said.

``Things are pretty normal,'' though there has been ``some effect on the stock market in sympathy with other stock markets in the world.''

No risk to banks from subprime

India's banks face no risk from the rout in the U.S. subprime-mortgage market, Mohan said.

"I don't think we're much affected, because our financial institutions, our banks, don't really have exposure to these markets,'' Mohan said today in an interview in Jackson Hole, Wyoming, where he is attending the Federal Reserve Bank of Kansas City's annual economic symposium.

"Things are pretty normal,'' Mohan said, though there has been ``some effect on the stock market in sympathy with other stock markets in the world.''

India's central bank aims to maintain a consistent policy toward its currency, the rupee, Mohan said.

"We'd like the exchange rate to be market-determined even though we intervene on a regular basis,'' he said. ``Our policy objective is essentially to reduce volatility in the market.''