A day after the Reserve Bank of India (RBI) tightened norms governing external commercial borrowings (ECB), Governor D Subbarao said the capital flow into India was in line with the requirement and current account deficit.
He also assured there was no threat of a capital surge or an asset bubble building up at present.
“At this time, there are price-based and quantity-based controls on debt and equity flows under our current regime. Yesterday, we reversed some of the easing we had done on the ECB policy. Currently, capital flows are in line with the requirement. If and when there are excess capital flows, we will have to response to that situation...We are (capital inflows) are roughly in line with our current account deficit. We cannot call it a capital surge like that what happened in 2006-08,” he said at a press briefing after the meeting of the RBI board board here today.
Yesterday, RBI reintroduced the ceiling on interest rates paid by Indian companies on ECBs, which will come into effect from January 2010. It also withdrew a special window, created at the time of the crisis, for companies to buy back foreign currency convertible bonds.
On excess capital flows resulting in an asset bubble, Subbarao said, “There is no concern about the inflows building up an asset bubble. As we said in the Q2 policy, if there is too much liquidity, it has a potential for an asset price build-up. Every asset price build-up need not necessarily result in a bubble. We are keeping a vigil.”
Shyamala Gopinath, deputy governor, RBI, said the interest rate ceiling on ECB should not be seen as a step towards capital control, but a part of the capital account management framework of the central bank.
“During the crisis, we liberalised the ceiling on ECBs, given the fact that Indian companies were not in a position to raise money at the spread prescribed by RBI. This dispensation lapses in December. This was reviewed by a high-level committee chaired by the finance secretary which felt since the market has become normal and spreads narrowed, we would just go back to the position that existed prior to the liberaslised dispensation...It does not indicate that we are in for capital control. This is a part of the capital account management framework,” said Gopinath.
On the issue of low non-food credit offtake, Subbarao said companies were able to raise money from cheaper sources.
“The non-food credit growth is around 10.40 per cent. As mentioned earlier in our policy statement, we have studied this situation. even as the demand for credit is going up and companies are returning to invest more, they are able to raise money from non-debt and other cheaper sources. We hope the demand for credit from banks will go up,” he said.
On high interest rate charged by microfinance institutions (MFIs), he said, “While RBI does not regulate the interest rate of MFIs, according to our perspective, the interest rate of 24-36 per cent is certainly higher than the benchmark prime lending rate (BPLR). MFIs should look at bringing down the interest rate, taking into consideration their cost of funds.”
