Managing capital inflows a great challenge: RBI governor

30 October 2007

Mumbai: Managing the inflow of foreign funds is the biggest challenge of monetary policy, Reserve Bank of India governor Yaga Venugopal Reddy said while announcing the central bank''s credit policy review.

Echoing concerns raised earlier by finance minister P Chidambaram on massive capital flows into the country, he said that participatory notes, an instrument used by unregistered foreigners to invest in local shares, were not desirable.

"Our approach, our stand with regard to participatory notes is that they are not desirable," he said.

Market regulator Securities and Exchange Board of India (SEBI) had last week curbed the issue of participatory notes, saying it wanted flows to be transparent.

"On the domestic front, the biggest challenge is the management of capital flows and the attendant implications for liquidity and overall stability," RBI said in the mid-term review of its monetary policy.

RBI raised the cash reserve ratio (CRR) requirements - the amount of cash banks have to keep with the central bank - by 0.5 per cent to 7.5 per cent as part of efforts to suck excess liquidity from the system.