India not to impose Capital Controls like other Asian countries as Economy's absorbing capacity increases

India looks unlikely to impose capital or currency controls like Asian countries to stem the increasing capital inflows from developed nations.The Indian government and the Central Bank have decided that India’s large and growing economy can absorb the foreign capital inflows much in excess of the current $78 billion projected for this year.The capital inflow capacity has been increased by almost 40% to $150 billion per year.The reason for India’s move is that the country still has a large trade deficit and runs a big current account deficit as well.Thus a  large capital account surplus is needed in order to balance the current account deficit.Unlike other Asian countries,India has not followed an export driven model which leads to large current account surpluses like China.India’s economy is more internal consumption driven with imports exceeded exports.The Indian economy has huge capital needs as it has to find  almost $500 billion in the next 5 years to upgrade its inadequate infrastructure.

India can take inflows up to $150 bn without capital controls: RBI, govt – FE

Policymakers are now more optimistic of the economy’s capacity to absorb capital inflows without having to resort to artificial controls. The government, together with the Reserve Bank of India (RBI), have discussed the matter and have come to an understanding that given the import-intensity of the fast-growing economy, the tolerable level of net capital inflows could be informally set at $150 billion, up from the earlier figure of around $110 billion.

The Centre and RBI reckon that due to strong domestic growth and limited export growth, more external capital would be needed to finance the current account deficit, (CAD) which is estimated at close to 3% of GDP for 2010-11.

RBI rapidly raising rates to fight double digit inflation

India’s Central Bank has played an exemplary role during the GFC as the Indian economy escaped unscathed from the crisis.India’s financial sector was almost totally unaffected as strong prudent controls by the RBI prevented any liquidity or solvency problems.RBI has come under criticism for not raising interest rates fast enough to control inflation which is running into double digits.The Central Bank has responded by raising rates faster than expected to control inflationary expectations.The interest rate hike last month was the 4th this year as double digit inflation fuels protests and strikes in a country where the majority of the population lives under $2/day.

RBI raises interest rates, more tightening seen – Yahoo

The Reserve Bank of India (RBI) raised interest rates more forcefully than expected on Tuesday to fight inflation that is on track to hit double digits for a sixth straight month, setting the stage for more policy tightening.One-year overnight interest rate swap rates jumped after the RBI notched up its fourth rate rise this year and said it was “imperative” to normalise policy in line with the economy’s growth and inflation.

“The dominant concern that has shaped the monetary policy stance in this review is high inflation,” the central bank said, striking its most hawkish tone since the global downturn.

The RBI lifted the repo rate, at which it lends to banks, by 25 basis points to 5.75 percent, matching forecasts. But it bumped up the reverse repo rate, used to absorb excess cash, by 50 basis points to 4.50 percent — more than the expected quarter point.