Public CompanyVolatile capital flows could pose problems, says RBI
Rapid and volatile capital inflows or outflows could pose significant policy challenges, potentially leading to exchange rate overshooting, asset price volatility and financial instability, Reserve Bank of India (RBI) Deputy Governor Shyamala Gopinath said in Mumbai today.
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“In this context, appropriate and pragmatic use of capital account regulations may have to be considered by emerging markets to maintain financial stability,” said Gopinath
However, Gopinath said capital inflows were not a concern at the moment.
“We don"t look at the levels (of the rupee), only the volatility. There have been no concerns on inflows,” Gopinath told reporters on the sidelines of a conference.
In 2009, foreigners bought $17.5 billion worth of domestic shares, just $327 million short of the 2007 record of $17.78 billion. The heavy buying helped the rupee rise 12.2 per cent from a record low of 52.2 hit in early March.
Separately, Gopinath said RBI would issue norms on repos in corporate bonds before its third quarter monetary policy review on January 29.
The central bank had in September last year proposed guidelines for repurchase agreements, or repos, in corporate bonds, a move bankers said would add depth to the relatively illiquid market.
However, the markets will have to wait longer for introduction of credit default swaps (CDS).
“We are looking very closely at what is happening in the international markets. This is something which is at a very embryonic stage and there are complex issues to be sorted out,” Gopinath said.
The deputy governor hinted that these instruments would be traded over-the-counter, saying that single-name CDS’ were not easily amenable to an exchange-traded or a central counterparty (CCP) platform. “Even in international markets I have not seen a single-name CDS traded on a CCP platform,” she said.
The deputy governor said public sector banks should improve their ability to lend in the term-money market. “The term-money market continues to remain dormant with low turnover despite several initiatives taken by the Reserve Bank, mainly reflecting the inability of the market participants to take a medium-term view on interest rates and liquidity,” Gopinath said. “However, the CD market is active and reflects the unsecured term-money market rates,” she added.
RBI is not in favour of relaxing the minimum tenor of non-convertible debentures from the current 90-day limit it had imposed in the second-quarter monetary policy review.
“The suggestion… cannot be acceded to as under the law, corporates are prohibited from issuing unsecured debentures with maturity of less than 90 days. Allowing markets to issue very short-term instruments could have systemic implications,” Gopinath said. She added that there were other instruments in the short-end like repo, CBLO (collateralised borrowing and lending mechanism) and CPs that could meet the requirement of investors.