The Reserve Bank of India (RBI) will intervene if foreign inflows were lumpy or volatile, Governor D Subbarao said in Washington. The RBI governor also reiterated that the most important objective of monetary policy was financial stability and not just inflation control.
On intervention, it is the clearest possible policy stand from RBI following a surge in overseas inflows and strengthening of the rupee.
“We haven’t (intervened) despite receiving more portfolio inflows last month than in any other single month on record. The reason we did not feel the need to intervene is because our absorption, driven by a widening current account deficit as imports have surged on the back of a positive outlook on growth and investment, has also increased,” Subbarao said in a speech delivered at the International Monetary Fund meet on October 9.
“That does not mean we won’t intervene. If the inflows are lumpy and volatile or if they disrupt the macroeconomic situation, we will do so.”
RBI’s statement comes within days of the Finance Minister Pranab Mukherjee saying the central bank is watching and there was no need for an intervention just now.
“Our intervention will be to keep liquidity conditions consistent with activity in the real economy and to maintain financial stability,” Subbarao said.
Inflows in September were higher than in any other single month on record. Overseas funds have invested $21.4 billion in local stocks and $10.5 billion bonds, the highest in any year since India permitted such investments in 1992, pushing the Sensex to its highest level in about 34 months.
The rupee has gained more than five per cent since September and traded at 44.44 per dollar on Friday, raising concerns among exporters. India’s foreign exchange reserves have also risen to $294 billion following the inflows. India’s current account deficit widened three times in the quarter ended June.
