Wednesday, October 13, 2010

Foreign inflows: Subbarao, Pranab not on same page..............


Foreign inflows: Subbarao, Pranab not on same page
RBI Governor Worried About Excessive Inflows But FM Wants Growth Momentum
Gayatri Nayak & Ruchira Roy MUMBAI
RBI governor Subbarao and finance minister Pranab Mukherjee are beginning to sing from different song sheets on policy for the first time since the collapse of Lehman Brothers in September 2008.
Mr Subbarao is showing signs of joining the global chorus of policy makers about excessive inflows potentially causing short-term instability in the financial markets while Mr Mukherjee is stubborn in building the economic growth momentum, even if it means hitting a few bumps along the way.
The prospective cracks in policy issues surfaced during the public meetings in the US last week where both addressed investors, policy makers and economists. Neither of them committed to an explicit stand on capital flows as they hid behind ifs and buts.
But the market has begun reading between the lines.
It is possible to construe there are differences between the central bank and the finance ministry after the governors speech in Washington, said Abheek Barua, chief economist at HDFC Bank. However, their respective stands are at two different levels and hence cannot be compared.
The Indian rupee ended 25 paise higher to 44.67, the benchmark Sensex fell 0.67% to 20203.34.
Economies that have current account surpluses or only small deficits have intervened, Subbarao said at the weekend in Washington. That does not mean we wont intervene. If inflows are lumpy and volatile, or if they disrupt the macro-economic situation, we will do so, he had said.
This is probably the most unambiguous statement that can come from a central banker. But what does an investor do when the boss, the minister, says something that could be read differently.
I do not think that the situation has arisen in the Indian economy today, Mr Mukherjee told an audience in Washington regarding inflows impacting the currency market. I dont think it is going to be too volatile. It has not distorted market sentiment and, therefore, there is no question of putting any curbs.
Subbarao is not alone in the club of the worried. Many countries such as South Korea and Mexico have taken measures such as taxing inflows to stem the tide, which some believe is hot money. Bank of Japan intervened to depreciate the yen against the US dollar after it touched a 13-year high, threatening its fragile recovery.
The Institute of International Finance has forecast a 30% increase in inflows into emerging markets this year at $825 billion.
Overseas investors have poured in a record $22 billion this year into Indian equities and $10 billion into debt as they chase higher yields, making Indian stocks and the currency best performers in Asia this month. However, the strengthening rupee is hurting exports, but making imports profitable. Also, the risk to financial markets, in case of a reversal, is growing.
The interest rate differential between advanced economies and EMEs (emerging market economies) have naturally triggered capital flows into EMEs, putting upward pressure on their currencies and complicating their macro-economic management, said Subbarao. We are back to facing the usual dilemma of managing the impossible trinity, he said, referring to managing currency, inflation and growth.

My Comments:
I remember very well that I have discussed about this policy of RBI then governor Mr.Y V Reddy is too defensive in curbing FII inflow.
At that time also when Mr YV Reddy was the governor he started taking steps for curbing the Inflow of overseas Institution I was against it.
When India needs more FDI and FII money why RBI is trying to curb it?That was a defensive step at that time.But unfortunately US Subprime crisis came out and that decision proved to be a boon instead a bane.
I argued at that time what if Sub prime Crisis would have not occured?Will that steps would be useful?
But with the debacle in US financial market, world analyst appluaded Y V Reddy's step for checking the FII inflow as after that there was a plight of FII taking out the money back and if more money had been come, there could have been more debacle.
World acknowledged Y V Reddy's steps for taking steps for trimming down the inflow at that time as that saved us from distructing the market more badly.
Now from the above news again the same debate has come to FORE.Present RBI governor Mr . Subbarao wants to check the inflow due to inflation and currency fluctuation etc and our FM Pranab says we need foreign inflows for economic growth.Let me write here that Mr Pranob Mukerji is no new to finance and he remained Fin Minister when late Indira Gandhi was PM.
So it is not so that Pranab Mukerji don't understand anything.After Manmohan Sigh the next best politician fit to be FM is none other then Pranob Mukerji.
These topic I discussed at other place as well at that time and wrote the same view that Y V Reddy's was defensive.We don't need defensive RBI governor.
Agreed that FII has pumped in huge money this year and that is why rupee is appreciating which is not good for exports like IT services, Textile export etc.
Subbarao says that these are hot money and they have a plight to fly at any time.Well if something bad comes even then they will sell in our market.
He says he is trying to check ST volatility while  trying to curb inflow but it is very hard to distinguish between hot money and LT money which are here to stay.
While doing that both will be affected and these step can boomrang.
Let us see what future unfolds from this.I am a keen observer of this play.But Pranab stands vindicates my stand that we need money for economic growth even with some bump......


  1. Hi Rajeev,

    Mr. YV Reddy saved India from a huge crisis. Even in 2007, famous economist Paul Krugman had been predicting a crash because of the bubble in the USA but no one listened to him. Krugman won the Nobel prize for Economics last year.

    The then-FM Chidambaram put maximum pressure on Mr. Reddy by official and unofficial means but he stood firm to his views as a responsible banker by controlling inflation and volatility.

    We need more and more investment, you are absolutely correct. Two types of investment are there: FDI- foreign direct investment and FII- foreign institutional investment. If an MNC builds factories in India to make its products, I would value it more than even 10 times that investment made by some hedge fund. Because hedge fund manager will take out his investment when he gets 30-40% gain but the MNC will stay in India for even 50-100 years and create value for lakhs of Indians.

  2. if i do hard work 10% of rajiv bhai this is big acheivment for me
    Rajiv is not a man
    He is superman
    i follow his every recomandation but not abel to buy all due to lack of fund