Capital controls in India not imminent: Ing Vysya

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Capital controls to curb foreign inflows are not imminent but some easing measures could be partly reversed once the economic recovery is clearly established, head of treasury at Ing Vysya Bank, said on Tuesday.

"This, we feel, will be sector specific. While we may see regular rhetoric, we can expect some more tolerance before any policy comes up to curb capital flows," RK Gurumurthy, a senior forex dealer, said in an interview.

Earlier this year India eased foreign borrowing in the infrastructure and real estate sectors and raised the foreign investment limit in corporate bonds to USD 15 billion.

Gurumurthy saw likelihood of soft curbs on foreign investment like a tighter cap on spreads over LIBOR for forex borrowers, stringent/stricter end-use norms, and a revision of the spreads for NRE deposits.

The thrust of Indian policy reform after the balance of payments crisis in the early 1990s has been to encourage non-debt inflows, Gurumurthy said.

"Although non-debt flows have gained importance, debt flows have increased significantly in the last 2-3 years. Controls on debt flows may come in once domestic credit growth is clearly established," he said.

Though foreign institutional investment flows would depend on how the global risk aversion shapes up, he added.

Last week, comments from policymakers that there was no need for capital controls in India at the moment had calmed market fears after economies such as Brazil and Taiwan took steps to curb hot money inflows.

Foreign money in shares is a key driver for the rupee. Inflows of USD 15.3 billion so far in 2009 have helped the rupee bounce back from a record low of 52.2 hit in early March.

Rupee seen firm, bonds soft

The benchmark share index has surged 78% in 2009 while the rupee gained 4.5% in the same period. The local unit has however gained 12% from its record low.

The rupee is likely to continue its broad appreciation and could touch 44-44.5 per dollar in the next six months but its direction will not be predicated to equity markets alone, Gurumurthy said.

"If we distinguish between hot and real money, I think some bit of winding up in the former is likely, but the flow of latter will continue as the economic recovery gathers pace."

On the monetary policy front unwinding would be gradual, with limited impact on currency and capital markets. He said he saw the first rate hike likely in March or April 2010 but a cash reserve ratio increase at the January 29 policy review was likely.

A mild relief rally in government securities was expected with supply concerns now out of the way, but expectations of a higher gross market borrowing next fiscal and higher inflation would limit the downside for yields, he said.

"A dip below 7% (for the benchmark 10-year bond) soon and then a broad 6.80-7.40 range until fiscal end seen as a likely outcome."

Lower stock of intervention bonds and lower bank appetite due to high yields and mark-to-market risks could also discourage fresh investments in debt, which would be a challenge for next year's borrowing programme, Gurumurthy said.