India can take inflows up to $150 bn without capital controls: RBI,govt

Policymakers are now more optimistic of the economys capacity to absorb capital inflows without having to resort to artificial controls....

Policymakers are now more optimistic of the economys capacity to absorb capital inflows without having to resort to artificial controls. The government,together with the Reserve Bank of India (RBI),have discussed the matter and have come to an understanding that given the import-intensity of the fast-growing economy,the tolerable level of net capital inflows could be informally set at $150 billion,up from the earlier figure of around $110 billion.

The Centre and RBI reckon that due to strong domestic growth and limited export growth,more external capital would be needed to finance the current account deficit,(CAD) which is estimated at close to 3% of GDP for 2010-11.

CAD,the difference between export and imports,plus remittances and net invisible,is financed through surplus capital account (or net capital inflows),which include foreign direct investment,portfolio investment,banking capital and external loans. The countrys absorption capacity,as reflected by CAD,has gone up more than four times between 2007-08 and 2009-10,according to RBI data. During this period,CAD had increased from 1% of GDP ($9 billion) to 2.9% ($40 billion). This gives authorities the leeway to tolerate higher capital inflows.

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The Prime Ministers Economic Advisory Council estimates that the country will attract net capital inflows of $73 billion in the current fiscal,which,it thinks,is manageable. The amount is projected to rise to $91 billion in 2011-12. The council has stated that these capital flows can be readily absorbed by the need for financing the economys high growth.

However,the councils head,C Rangarajan,has voiced the need to tweak trade policy in order to rein in CAD.

While RBI does not follow any explicit benchmark for capital inflows,data for fiscal 2007-08,when capital inflows touched an all-time high of $110 billion,serve as one. With an increase in the growth rate and a rise in current account deficit,this benchmark has been pushed to $150 billion, a government official said.

This is significant,since it indicates tolerance for higher inflows,even though RBI continues to monitor volatility. This was evident in RBIs review of the monetary policy on July 27.