The Reserve Bank of India (RBI) will continue to maintain some controls on debt-creating fund flows even as it prefers fund flows into equity capital, governor D Subbarao said today.
He said RBI's monetary policy stance has been calibrated by widening current account deficit in the country's balance of payments.
If the trend of the first quarter of 2010-11 persists, the current account deficit as a percentage of GDP for the full year will be significantly higher than in last year, he pointed out.
"It is generally perceived that a current account deficit above 3 per cent of GDP is difficult to sustain over the medium-term," he said.
However, considering the need for investment capital and the tight liquidity conditions within the economy, the governor said, monetary policy should aim at "actively managing liquidity to ensure that it remains broadly in balance, with neither a surplus diluting monetary transmission nor a deficit choking off fund flows."
In the short term, RBI said, the task is to see that the current account is fully financed while ensuring that capital flows are not far out of line with the economy's absorptive capacity while, in the medium term, the policy focus should be on reining in the deficit.