19 Nov 2009 12:34

Lower CB rates, floating exchange rate to discourage short-term capital

MOSCOW. Nov 19 (Interfax) - Lower Central Bank rates and a floating exchange rate will reduce the incentive for short-term capital to enter Russia, CB First Deputy Chairman Alexei Ulyukayev said at a conference in Moscow.

"I think lower interest rates and free exchange rate policy will create less and less motivation for short-term capital inflow," Ulyukayev said.

Regarding carry trade, which the CB is also urging investors not to over-indulge in, Ulyukayev said spread between rates on the Russian and global markets could be narrowed to 2-3 percentage points "relatively soon, in the next year or two," and that this would lessen the motivation for carry trade.

The differential is currently around 6 pp as the base rate at which the CB refinances - the one-day repo rate - is 6.75%, while the European Central Bank's base rate is 1% and the Federal Reserve's rate is 0.25%.

But Ulyukayev said narrowing the spread would not affect foreign direct investment because investors here are concerned about legal safeguards and guaranteed returns for their investments rather than exchange-rate fluctuations.