The Indian government did not need to restrict foreign institutional investment and foreign direct investment at this time, Finance Minister Pranab Mukherjee said after the rupee climbed to near-two-year high.
“I do not think that situation has arisen in the Indian economy today,” Mukherjee said in remarks in Washington yesterday. At the same time, he said it was the responsibility of the central bank of every country to watch inflows that might make it vulnerable to currency appreciation, and intervene “as and when it is necessary.”
The rupee has gained 5.3 per cent against the dollar in the past month, making it Asia’s best performer, as foreigners added about a net $20 billion to holdings of local stocks this year on optimism about India’s growth prospects. Countries from Brazil to South Korea have taken steps to cool currency appreciation amid rising capital flows into emerging and Asian economies.
International investors’ purchases of Indian shares this year have also helped drive the Bombay Stock Exchange’s (BSE’s) benchmark Sensex close to a record.
“I don’t think it is going to be too volatile,” Mukherjee said, referring to the capital inflow. It “has not distorted market sentiment and, therefore, there is no question of putting any curbs.”
Rupee, stocks
The rupee fell 0.3 per cent to 44.31 against the dollar in Mumbai at 9:10 am today. BSE’s Sensex declined 0.3 per cent to 20,246.44.
Mukherjee was speaking at an event organised by the Woodrow Wilson Center and the Federation of Indian Chambers of Commerce and Industry.
The recent moves by countries to stem gains in their currencies have triggered concern about protectionist retaliation that would impede global growth. Brazil Finance Minister Guido Mantega, a delegate to the International Monetary Fund annual meetings in Washington this week, said on September 27 there was already a worldwide “currency war.”
Mukherjee said there was a need for countries to work together to find solutions to the tension over exchange rates.
“We should try to engage the countries in negotiations and build up a consensus through which the matter can be resolved,” he said. “It cannot be resolved through confrontation.”
Turning to the Indian economy, the finance minister said, while “there is inflationary pressure in the system,” he was more watchful of rising food prices.
On the supply side, steps were being taken to address the shortage of some goods through imports, and on the demand side, the increase in interest rates by the Reserve Bank of India meant “a part of the excess liquidity will be mopped up,” he said. The hope is that by the end of the financial year, the country’s inflation rate would be around 6 per cent, Mukherjee said.
RBI last month increased interest rates for the fifth time this year, the most number of times among Asian central banks this year, and said its moves had brought the “monetary situation close to normal.” The bank’s reverse repurchase rate is 5 per cent and the repurchase rate is 6 per cent.
