Subbarao Says India Requires Capital Inflows to Finance Deficit

India’s concerns about capital inflows are “less acute” than other countries because it needs the funds to finance its current-account deficit, central bank Governor Duvvuri Subbarao said.

After the U.S. announced its second round of quantitative easing in August 2010, “the prospect of easy liquidity in the U.S. seemed to prompt a large increase in capital flows to emerging market economies, threatening domestic price and financial stability,” Subbarao said in Zurich today, according to a speech e-mailed by the Reserve Bank of India. The U.S. move also seemed to stoke global commodity prices, he said.

“This combination has put some emerging market economies in a policy bind, but higher interest rates will only intensify capital inflows, potentially putting more pressure on exchange rates and domestic stability,” he said. “In India’s case, the concerns on this account currently are less acute since capital flows are needed to finance our current-account deficit.”

Higher inflow of funds has strengthened Asian currencies, led by Indonesia’s rupiah and the Singapore dollar. The rupiah gained 5 percent this year and the Singapore dollar has advanced 4 percent. The Indian rupee has weakened 0.1 percent during the period, according to data compiled by Bloomberg.

India’s current-account deficit, a measure of trade and investment flows, narrowed to $9.7 billion in the three months ended Dec. 31. from a $16.8 billion shortfall in the previous quarter, according to the central bank.

“Yet even for us, the composition of the inflows remains an issue,” Subbarao said. “About three-quarters of the current-account deficit has been financed by volatile capital inflows.”