Brushing aside concerns over the hot money chasing investments in India, Duv­v­uri Subbarao, governor,

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RBI, said interest rate differential is not the only factor that influences capital flows. According to him, RBI will continue with the policy of preferring capital flows into equity rather than debt, and maintain some controls in respect of debt flows.

According to Subbarao, it has often been argued that the widening of interest rate differential between the domestic and international markets will result in increased debt-creating capital flows. “While it is true that large interest rate differential makes investment in domestic debt instruments and external borrowings by domestic entities more attractive, we need to keep in view other aspects too,” governor said in his address to the media during the post policy announcement.

The economy’s capacity to absorb capital flows has expanded as reflected in the widening of the current account deficit, Subbarao said. According to him, despite the already large differential between domestic and international interest rates, capital flows in the recent period have been predominantly in the form of portfolio flows into the equity market. “This suggests that the interest rate differential is not the only factor that influences capital flows,” Subbarao said.