Capital flow reversal can be handled: RBI

Says open market operations a corrective step to get to the preferred band of deficit.

India had the resilience to manage capital inflows, Reserve Bank of India (RBI) Deputy Governor Shyamala Gopinath said On Wednesday.

The country was not dependent on external demand and even in case of reversal of capital inflows, it would be in a position to manage well, she said in a conference call between analysts and the RBI brass.

Gopinath said she didn’t expect a reversal, if any, to be more than short-lived. India would not have any problem in managing its current account deficit, which could be about three per cent of the gross domestic product, she said.

RBI Governor, D. Subbarao said a robust solution to inflation was to increase supply. RBI yesterday raised its key policy rates by a quarter percentage point to tame the rise in prices.

While demand pressures had eased a bit from July and September levels, they were still higher than the long-term trend, Subbarao said. He added India needed to expand supply to meet the growing demand.

On liquidity, Deputy Governor Subir Gokarn said RBI’s open market operation to buy back three lots of government bonds for up to Rs 12,000 crore was a corrective aimed to get to the preferred deficit band. It would not dilute efforts to tighten monetary policy or RBI’s resolve to fight inflation, he added.

The central bank yesterday offered to purchase bonds maturing in 2015, 2016 and 2022 on Thursday, soon after announcing its monetary policy. Though a liquidity deficit was consistent with an anti-inflation stance, excessive deficit could be disruptive for financial markets and credit growth RBI said.

“The liquidity was over-tight and we are only trying to ease it to bring it within our comfort range,’’ said Gokarn, a day after RBI announced its monetary policy for the second quarter. “It is not diluting our tighter monetary policy or resolve to fight inflation. The operation is a corrective step aimed to get to the preferred band of deficit.’’

RBI would prefer liquidity to be between plus or minus one per cent of banks’ net demand and time liabilities.

On microfinance institutions, Governor Subbarao noted RBI had set up a committee to examine the sector, following the Andhra government ordinance on the issue. The RBI can regulate only those MFIs which are also non-banking finance companies. Of the 37 non-money taking NBFCs, 3 are systemically important. Loans by banks to the MFI sector come under the priority sector and there is no systemic problem, another official added.