BoP worries

Wrong policies responsible for BoP worries: JP Morgan

Our Bureau MUMBAI

IN ITS latest report on India’s balance of payment (BoP), JP Morgan’s ‘Asia Markets Research’ has blamed policy measures for exacerbating the increase in capital inflows, complicating the monetary management. BoP measures the payments that flow between any individual country and all other countries. It is used to summarise all international economic transactions of a country during a period.
The report says that the India’s BoP has shown a record increase in capital inflows that have substantially offset a gradual widening of the current account deficit. The report has pointed out that policy inconsistency is encouraging capital inflows, which is conflicting to domestic monetary goals.
“The magnitude of the inflows has overwhelmed the central bank, and complicated monetary policy. Moreover, policymakers made their task more difficult last year by increasing the ceiling on overseas borrowing by Indian corporate. Cutting this ceiling would ease the self-inflicted pain, though it is unlikely to fully reverse the appreciation pressure on the rupee,” it said. It has also suggested the discontinuation of offering preferential returns to NRIs and a reduction of the ceiling on external commercial borrowings (ECBs). “No matter how well intentioned last year’s hike in the ECB ceiling, the government now needs to reassess that policy action and cut the ceiling to ensure monetary stability,” said the note to their clients.
JP Morgan estimates that India posted a merchandise trade deficit of $64 billion (7% of GDP) in 2006-07 (fiscal year ended March 31), up from $51.8 billion in the previous year. Yet, the current account deficit worsened only marginally in dollar terms and as a share of GDP. “A striking feature of the deterioration in the current account deficit is how slow it has been, despite the boom in domestic demand and a sharply higher merchandise trade deficit. The explanation lies in record-high surpluses on invisible trade, which include receipts for software exports and remittances from Indians working overseas,” the report adds. It has called for stepping up economic reforms, such as cutting import duties and improving physical infrastructure, which would substantially increase the economy’s ability to digest net capital inflows without the unwelcome consequences for inflation and asset prices.
Listing out the implications for the monetary policy, the report says, “A key challenge for policymakers is that the economy is not running wider current account deficits that would substantially ease the pressure on the exchange rate to appreciate. Worse, policymakers have announced measures that have boosted capital inflows, thereby complicating their own task of monetary management at time when a tight monetary policy has to be in place.”
It says that the differences between the RBI and the ministry of finance on capital inflows have contributed to the inconsistent policies. It further said that RBI was battling capital inflows that were substantially policy induced. On RBI’s recent move to make NRI deposits less attractive by cutting the ceiling for interest rates on these deposits, it says, “In reality, India needs to overhaul the NRI deposit scheme or even dismantle it as it has outlived its usefulness.”