Rupee to gain against dollar target 41

India okay with $70bn cap inflows, eyeing QE2
India can manage capital inflows of up to USD 70 billion and there is no need yet to impose curbs, but it must be alert to the latest round of US quantitative easing, a top economic adviser said on Thursday.


Several Asian policymakers are worried the US Federal Reserve's move to buy USD 600 billion in government securities will lead to a surge in hot money inflows into emerging markets, creating asset bubbles and complicating monetary policy setting.

"The need to act on capital flows has not come yet, but we will need to watch capital flows," said C Rangarajan, chairman of the Prime Minister's Economic Advisory Council.
India's response to the move has been muted in comparison with other nations like China, South Korea and Brazil, offering some comfort for the United States as it tries to soothe tensions and hammer out an accord at the G20 summit underway in Seoul.
Asia's third-largest economy needs foreign inflows to bridge its widening current account deficit, expected to be around 3% of GDP in the 2010/11 fiscal year to end-March 2011. Policymakers are confident India can easily finance the gap.
Since January, foreign investors have poured in USD 28.5 billion into the equity markets, pushing the benchmark stock index up nearly a fifth and the rupee up 5.3%.
Rangarajan's comments are in line with that of Montek Singh Ahluwalia, another key aide to Prime Minister Manmohan Singh. The central bank has also said it will intervene in the forex markets only if inflows turn lumpy or volatile.

The current tight liquidity situation in India is temporary and is expected to ease in a month's time on government spending, C Rangarajan, chairman of the Prime Minister's Economic Advisory Council, said on Thursday.


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Adviser sees cash tightness easing in a month


Cash conditions have remained tight since last month on tepid government spending, and increased bank withdrawals ahead of the festive season.
Banks borrowed Rs 75,565 crore (USD 17.5 billion) at the morning repo auction compared with nearly Rs 1.2 trillion at the central bank's twin repo auctions on Wednesday.

Rangarajan also hinted at the possibility the central bank will intervene in the foreign exchange market amid robust capital inflows, which may in turn create some rupee liquidity.

"Also, if part of capital flows are absorbed by reserves then that will expand liquidity also," Rangarajan said.

India's central bank on Tuesday reintroduced measures to provide liquidity comfort to banks, arising out of the frictional liquidity pressure, but unlike the previous time, did not announce any open market bond purchases.

However, markets did not cheer the Reserve Bank of India's (RBI) recent measures, as there was no effective liquidity injection per se.

Thumbs down interbank cash rate had shot up to 12%

The interbank cash rate had shot up to 12% on October 29 with cash tightness aggravated by Coal India IPO refunds, but subsequently cooled off after the RBI's first round of cash support measures.

However, the overnight rate has been hovering around 7.00-7.25% this week, much above the RBI's repo rate of 6.25% and the benchmark 10-year bond yield revisited over one-week highs of 8.09% on Thursday.

The one-year overnight indexed swap also reflected the cash strain with the rate rising to 6.78%, its highest since October 28.

"All the measures will only lead to higher borrowing either from the market or from RBI, but effectively there is no reduction in the tightness," said a dealer at a foreign bank.

RBI sources say government's surplus cash balance is around Rs 80,000 crore (USD 18 billion), indicating the lack of adequate spending.

The market is hoping the central bank will buy bonds through a second round of open market operations (OMO) to ease cash tightness, or for the government to postpone part of its borrowing plan.

In the first round of its recent OMO auction on November 4, the RBI bought Rs 8,352 crore of bonds against its target of Rs 12,000 crore. (USD 1=Rs 44.2)