Prime Minister’s Economic Advisory Council Chairman C Rangarajan today said that the rupee might continue to appreciate on the back of large capital inflows. This is despite significant current account deficit.
“Capital inflows have come to dominate the balance of payments and exchange rate may begin to appreciate, even if there is a significant current account deficit,” Rangarajan said in a speech delivered at Indira Gandhi Institute of Development Research here.
So far in 2010, foreigners have been net sellers of about $500 million of equities and analysts expect India to attract more funds in future.
According to RBI data, foreign investment flows (direct plus portfolio investments) in the country touched $50.17 billion in April-December 2009.
The rupee is up 0.7 per cent so far this year, after having risen 4.7 per cent in 2009. It appreciated today to close at Rs 46.18 against the dollar.
Rangarajan, who once headed the Reserve Bank of India (RBI), said any intervention by the central bank in the foreign exchange market must be an exception and not a rule. No monetary authority can afford to ignore prolonged volatility or mis-alignment in the foreign exchange market.
RBI has said it intervened in the foreign exchange market only to prevent excessive volatility, but it did not target any specific level for the currency.
Turning to rising inflation, he said the good rabi crop was expected to have a stabilising effect and did not see inflation (based on the wholesale price index) hitting the double-digit level.
The headline inflation rate, as measured by the wholesale price index, rose significantly to 8.56 per cent in January 2010, beating RBI’s projection of 8.5 per cent by March 2010.
The increase in the overall inflation rate was primarily driven by rising fuel prices, though the consistently rising food prices showed some moderation during the month
RBI Governor Duvvuri Subbarao in his speech said the central bank couldn’t just focus on inflation while formulating the monetary policy, as growth was also a concern for a developing country like India.
Inflation was largely driven by supply-side factors and measures available with the central bank impacted the demand-side factors, Subbarao said.
