RBI wants flexibility on exchange front

The RBI Report on Currency and Finance released said if capital flows persist, greater flexibility with regard to the exchange rate management may be needed. The report, which has the external sector as the theme, said: “If capital inflows persist, the monetary policy instruments would need to be supplemented by other durable macroeconomic policies, such fiscal adjustment, liberalisation of trade policies and capital outflow, and finally, a greater degree of flexibility in the exchange rate… trade and capital account liberalisation to manage capital inflows may be ineffective as it could induce further capital inflows since liberalisation might increase foreign investors confidence in the domestic economy.” While the views in the report are entirely those of the department of economic analysis and policy and should not be necessarily interpreted as RBI’s official view, this could mean that if capital inflows continue as they are, the rupee should be allowed to gain even as trade policies are used as a counter-balancing force. Incidentally, foreign funds invested $6.7 billion into local shares in 2003, helping the rupee rise 5.2 per cent.