Subbarao Says India May Act If Capital Inflows Disrupt Economy

India may intervene in the foreign exchange market if capital flows “disrupt” the economy, the central bank’s governor, Duvvuri Subbarao, said after the rupee rallied to be Asia’s best performer of the past month.

“If the inflows are lumpy and volatile or if they disrupt the macroeconomic situation, we will do so,” Subbarao said in a panel discussion at the International Monetary Fund in Washington on Oct. 9. “We’ve not found the need to intervene so far,” he told reporters.

The rupee gained 5 percent against the dollar in the past month as global funds pumped a record $21 billion into Indian stocks this year on optimism about the South Asian’s nation’s growth prospects. Subbarao’s comments came as countries from Brazil to South Korea took steps to slow currency appreciation amid rising capital flows into emerging and Asian economies.

“In recent months, when inflows have swamped most emerging market economies, several central banks have intervened in the forex markets,” Subbarao said. “The reason we did not feel the need to intervene is because our absorption, driven by a widening current-account deficit as imports have surged on the back of a positive outlook on growth and investment, has also increased.”

India’s current-account deficit widened to a record $13.7 billion in the three months ended June 30 as an accelerating economy boosted imports of oil and machinery. The International Monetary Fund last week raised its 2010 economic growth forecast for India to 9.7 percent from 9.4 percent it estimated in July.

Advance Pared

The rupee declined 0.5 percent to 44.4350 per dollar at close of trading on Oct. 8 in Mumbai, paring its advance during the week to 0.3 percent on concern importers will step up dollar purchases and the central bank may intervene in the foreign exchange market. In the past month, the Bombay Stock Exchange’s Sensitive Index has gained 8.6 percent to a near record 20,250.26.

“Our intervention will be to keep liquidity conditions consistent with activity in the real economy and to maintain financial stability,” Subbarao said. “And not to stand against developments driven by changing economic fundamentals.”