RBI Highlights Risks from Volatile Capital Flows

The Reserve Bank of India (RBI) has cautioned about the risks posed by sudden and volatile capital inflows and outflows in an environment of heightened global financial uncertainty. Shifting monetary policy stances in advanced economies, geopolitical tensions, and risk-off investor behaviour have increased the likelihood of abrupt movements in cross-border capital, posing challenges for emerging market economies like India.

One of the key concerns highlighted by the RBI is the impact of volatile capital flows on rupee stability. Large inflows can lead to excessive currency appreciation, affecting export competitiveness, while sudden outflows can put sharp depreciatory pressure on the rupee. Such exchange rate volatility can disrupt trade, inflation management, and overall macroeconomic stability.

The RBI also pointed to challenges to monetary policy autonomy. In a highly interconnected global financial system, domestic interest rate decisions can be constrained by external factors, as sharp rate differentials may trigger destabilising capital movements. This complicates the central bank’s ability to focus solely on domestic growth and inflation objectives.

To address these risks, the RBI emphasised the need for strong macro-prudential safeguards. These include maintaining adequate foreign exchange reserves, deploying flexible exchange rate management, and strengthening financial sector resilience. Regulatory tools such as counter-cyclical capital buffers and enhanced supervision of external borrowings were highlighted as important instruments.

Overall, the RBI’s caution underscores the importance of policy preparedness in managing global spillovers. A combination of prudent macroeconomic management, regulatory vigilance, and institutional flexibility remains key to safeguarding financial stability in an increasingly volatile global environment.