Capital control a legitimate policy response: RBI

Mumbai: Monetary authorities in many countries broadly accept imposing capital controls can be a legitimate component of policy response to excessive inflows, the governor of the the Reserve Bank of India said on Tuesday.

Duvvuri Subbarao said central banks needed to formulate new ways to tackle a surge in capital inflows, compared with current theory that draws from an outdated regime of fixed exchange rates and limited flows.

Bailouts and stimulus packages by Western countries to overcome the 2008 global financial crisis triggered huge capital flows to emerging markets that offered better returns, but the surge also caused problems such as currency appreciation and eroding export competitiveness.

"The crisis has changed the terms of that debate. It is now broadly accepted that there could be circumstances in which capital controls can be a legitimate component of the policy response to surges in capital flows," Subbarao said in a speech at the 60th anniversary celebrations of Central Bank of Sri Lanka in Colombo.

India has not imposed any tax on capital inflows, but Brazil had slapped restrictions.

Foreign fund flows into Indian equities have been tepid this year on concerns of high inflation and a wide current account deficit. Foreigners have sold shares worth a net $1.3 billion since the start of January, after buying a record $29.3 billion in 2010.

"We need to reach a shared understanding on two specific aspects: first, to what extent are advanced economies responsible for the cross border spillover impact of their domestic policies, and second, what is the framework of rules that should govern currency interventions in the face of volatile capital flows," Subbarao said.

"In as much as lumpy and volatile flows are a spillover from policy choices of advanced economies, the burden of adjustment has to be shared."

Source: Financial Express