Raghuram Rajan says it is important to have FII debt limits

Cautioning about reliance on foreign flows, Reserve Bank Governor Raghuram Rajan today advocated for continuing with caps on overseas investments in debt.
“…we are limiting our reliance on foreign debt. It is important we keep it this way and manage the economy in way that is careful and that is circumspect,” he said during an address at the 55th foundation day celebrations at the Somaiya Vidyavihar.
The Reserve Bank had in July raised the Foreign Institutional Investors’ debt limit by USD 5 billion to USD 25 billion, after the investments started nearing the USD 20 billion threshold.
According to reports, the additional headroom is almost exhausted and FIIs’ debt investments in the country are already nearing the USD 25 billion, leading to expectations that there might be an increase in the cap again.
Rajan said that the country has benefited from the foreign flows into the country, but advised caution, while dealing with such investments, which chase the best yields.
“We have to be careful about this money because if we say, ‘this is wonderful, they all like us, we follow tremendous policies and that’s why we got this money’, and we go and spend, we run large current account deficits based on these foreign borrowings,” he said.
“But this foreign borrowing cannot be taken for granted. At some point these investors will find greater usage of their money back home and they want to go out once again,” he added.
Rajan, however, said that through various measures we have been successful in “substantially” containing the current account deficit ( CAD), which narrowed to 1.7 per cent in FY’14 from an all time high of 4.8 per cent in the previous fiscal.