RBI prefers FDIs to short-term debt inflows

The Reserve Bank on Tuesday said it prefers long-term foreign direct investment (FDI) inflows to short-term debts as the former is more stable in nature.

"We prefer long-term equity flow into the country in the form of FDIs. Debt flows, particularly short-term debt flows, are not the preferred form of money flows," Deputy Governor Subir Gokarn said.

He was speaking at the 12th L K Jha memorial lecture titled 'Global Financial Flows, Global Imbalances and Crises' which was delivered by Prof Maurice Obstfeld of the University of California at Berkeley. The function was presided over by the Governor Duvvuri Subbarao.

The late Jha was the RBI Governor from July 1967 to May 1970 and was also a member of the Brandt Commission that probed the financial crisis of the developing economies in 1983.

Referring to the significance of maintaining a lower current account deficit (CAD), Gokarn said the country is far from any threshold of vulnerability on account of CAD, which currently stands at close to 3 percent of the GDP.

READ: Increase exports to narrow CAD, says RBI

He, however, said it is crucial to see how the CAD is financed to understand the possibility of instability for the economy and not the threshold per se.

CAD represents the difference in inflows and outflows of foreign exchange of a country.

The country received FDI worth USD 25.8 billion between April and September this fiscal, up from USD 11 billion in the same period last fiscal, according to the finance ministry data shared with Parliament last week.

The country has been maintaining a CAD of less than 3 percent in the recent past, which is mostly financed by the sustained capital inflows mostly and in part by short-term debts and portfolio investments.

But Gokarn emphasized that the policy stance of both the government as well as the monetary authority is to encourage FDIs and not short-term debt inflows.

Gokarn, however, said globalisation of financial systems have increased the opportunity for arbitrages, which has led to the 2008 crisis to some extent. Therefore, there is an urgent need for better regulation and more concerted coordination between the national monetary regulators.

"While the financial systems all over the world have been globalized, there is no international regulator. We do have only national regulators who deal with a globalized system.

So, it calls for some degree of coordination between the national regulators (to oversee global financial system)," he added.