Volatile capital flows may pose policy challenges: RBI
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Last Updated: Tuesday, January 05, 2010, 00:17
Mumbai: The Reserve Bank said rapid and volatile capital flows could present significant policy challenges, potentially leading to exchange rate overshooting, asset-price volatility and financial instability.

"Appropriate and pragmatic use of capital account regulations may have to be considered by the emerging markets to maintain financial stability," Reserve Bank deputy governor Shyamala Gopinath said here today.

The Reserve Bank, which is slated to announce its quarterly policy on January 29, is widely expected, on the back economic recovery and the spiralling food inflation, to hike the cash reserve ratio or the amount the banks park with the apex bank, to suck out excess liquidity from the system.

She said the central bank is closely monitoring the liquidity conditions in the system. "We are closely monitoring the situation. We need some patience. We are reviewing the monitory policy in this month," Gopinath said.

The RBI is also monitoring the volatility in the rupee-dollar market and has not observed any major concerns taking into account the current signals. "We don?t really look at the levels, but only the volatility. There are no major concerns over the inflows so far," Gopinath said.

In its bid to enhance liquidity in the bond market, the Reserve Bank is likely to come with the guidelines for repurchase agreements (repos) on corporate bonds as early as this month, she said.

Gopinath said the RBI is currently working on the guidelines to introduce repos in corporate bonds and expects to announce the guidelines this month.

"We need proper regulatory framework for corporate bonds repos...we are going to allow on OTC basis, we expect to come with the guidelines before the January policy," Gopinath said.

Allowing repos in corporate bonds will provide more liquidity and improve traded volumes in the debt market, enabling banks to borrow against their investments in corporate bonds.

To begin with, the apex bank plans to start only with highly rated bonds, Gopinath said. Though the foreign institutional investors have been allowed to invest up to USD 15-bn in corporate bonds, the actual utilisation remains very low, she said.

Referring to banks' investment in finaical instruments of mutual funds companies, Gopinath said RBI is assessing the situation now.

"We are getting information...we are trying to get a clear understanding of the situation. Then only we can determine whether to take an action or not," Gopinath said.

The apex bank is in the advanced stages of introducing other currency pairs for currency futures and are examining the issue of allowing plain vanilla currency options in consultation with the market regulator Sebi.

"We are in advanced stage. Internally agreed on what would be the position limits for each currency pair for trading members and non-trading members...We expect to do it before the policy," Gopinath said.


First Published: Tuesday, January 05, 2010, 00:17

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