MUMBAI, Aug 15: The Reserve Bank of India (RBI) has made net purchases of $ 4.6 billion from the foreign exchange market during the four-month period ended July of the current financial year.

The central bank had purchased $ 7.8 billion in 1996-97. ``With the influx of capital continuing in 1997-98, the RBI has accumulated $ 3.9 billion of foreign currency assets until August 8 in the current financial year (April-March),'' RBI deputy governor Y V Reddy said. As a result, foreign currency assets of the country have gone up to $ 26.03 billion as on August 1, 1997.

The RBI made substantial purchases of dollars in the forex markets in order to prevent the rupee appreciating as well as to protect international competitiveness. ``During 1997, the RBI intervened in the spot and forward markets, both in the outright and swap segments,'' Reddy told a meeting of forex dealers in Goa.

The sale of government bonds through open market operations is a strategy used to sterilise capital inflows which is temporarily successful but which in the long run leads to renewed inflows, he said, adding, ``we in the RBI, however, are well equipped with physical stock of government securities.''

``We have been active in the repo market in recent months to manage temporary liquidity conditions. The idea is to realise a fine balance in order to achieve the objectives of sterilisation without putting pressure on yields,'' he said.

Another technique available for the sterilisation of capital inflows was discount policy, which implies restricting the access of banks to central bank credit or raising the cost of refinance, Reddy said. ``But this instrument cannot be used in the current context when there is plenty of liquidity in the money market and there is no borrowing from the central bank,'' he added.

``However this instrument may go against the long-term objectives of monetary and credit policy.'' The variation of reserve requirements is another policy tool, Reddy said. ``Mobilising government deposits has served as a variation to absorption of reserves in some countries. Variable deposit requirement in the nature of interest free deposits with the central bank is another form of discouraging capital inflows,'' he said.

But the dangers of this measure were that it could result in the misallocation of resources and reduce the facility of borrowers to take advantage of lower international interest rates, despite reducing the need for costly sterilisation through bond sales. ``We have used the CRR successfully in the past to stem inflows,'' he said.``After the imposition of CRR on incremental NRI deposits there has been deceleration in the growth of foreign currency deposits.

Copyright © 1997 Indian Express Newspapers (Bombay) Ltd.