REUTERS: MUMBAI, APR 18 2013, 11:24 IST
Quantitative capital controls have been more effective for India in the short term but such limits can also be distorting, inefficient and inequitable, said central bank Governor Duvvuri Subbarao.
India has set a cap of $25 billion for foreign investment in government bonds and around $51 billion in corporate bonds.
Subbarao, in his remarks at the IMF conference in Washington DC on Wednesday, said the real risk of intervening in the forex market to protect a depreciating currency was depletion of forex reserves and still not being able to push up the exchange rate.
His remarks were posted on the Reserve Bank of India's website on Thursday.
"It should also be clear that a failed defence of the exchange rate is worse than no defence. So, when you are intervening in the forex market, it is important to make sure that your intervention is successful," Subbarao said.
The RBI had been intervening in the forex market in the last two years to protect a sharp fall in the Indian currency. The Indian rupee hit a life-time low of 57.32 to the dollar in late June 2012 and has recovered nearly 6 percent since then.
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