FM Rules Out Capping Foreign Capital Inflows.

Finance minister Pranab Mukherjee on Tuesday ruled out controls on foreign capital inflows, adopting a policy stance that runs counter to the trend in most of East Asia.

“At this point I am not thinking of putting any cap on FIIs (foreign institutional investors),” Mukherjee told the media at the annual economic editors conference.

FIIs have invested $24.5 billion (Rs.1.08 trillion) this fiscal, with around 25% of the flows coming in October alone. Consequently, the rupee has appreciated 4.5% against the US dollar this fiscal to around Rs.44.5. India’s stance is at odds with the approach of some other Asian policy makers faced with a similar situation.

Thailand, in the second week of October, slapped a 15% withholding tax on government bonds held by foreigners. Other countries such as Taiwan, Indonesia and South Korea have attempted to check the surge of capital inflows through less obtrusive measures.

In Hyderabad on Tuesday, former Reserve Bank of India governor Y.V. Reddy said the time has come for India to devise ways to control capital inflows. “Liquidity is coming to countries where inflation is very high. There is already a bubble building up and therefore something has to be done,” Reddy told reporters.

He said now the time has come to address the issue of capital flows and think about ways to control them.

Mukherjee’s options on capital flows may have been precluded by the burgeoning current account deficit—the excess of imports of goods and services over their exports. It needs the inflows to finance the deficit. India’s current account deficit in the April-June quarter was $13.7 billion, around 3.7% of the gross domestic product. “Given the current account deficit overhang, we doubt that India will impose capital controls,” Nomura International (HK) Ltd said in a 15 October report.

Mukherjee forecast that the current account deficit for the year would be between 3% and 3.5% of GDP, the first time in 20 years that it is expected to breach the 3% barrier. He said the surge in capital inflows could insure the economy against the widening current account deficit. A key cause of the widening deficit was the sharp growth in imports.

The growth in non-oil imports underpinned industrial growth as raw materials made up a big part of it, he said.

The competitiveness of exporters has been partly undermined on account of currency appreciation in the wake of capital inflows. “We have faced similar situation in the past and have overcome it without taking recourse to some of the more stringent policy measures that are by now well-known to discerning analysts,” Mukherjee said.

Rupee appreciation has a dampening effect on inflation as India imports almost 80% of its crude oil requirement.

Inflation, as measured by the wholesale price index (WPI), in September was 8.62%, higher than the Reserve Bank of India’s (RBI) long-term target of 3%. Mukherjee stuck to RBI’s forecasts on inflation in this fiscal and did not specify a timeline for lowering it.

“Taking into account the emerging domestic and external scenario, the baseline projection for WPI inflation for March 2011 has been raised to 6.0% from our April policy projection of 5.5%,” RBI governor D. Subbarao said in the quarterly monetary policy statement in July.

Mukherjee also stuck to earlier forecasts of 8.5% growth in the current fiscal. “In the short term, it is reasonable to expect that the economy will go back to the robust growth path of around 9% average that it was on before the global crisis slowed it down,” he said.

Mukherjee answered questions on the regulatory and operating challenges faced currently by microfinance institutions. He said the government expects the industry to evolve according to a self-imposed code of conduct, which would lead to a reasonable interest-rate regime and sustainable lending. The industry should also ensure the loan recovery mechanism is not coercive, the minister added.

Mukherjee defended the recent Andhra Pradesh ordinance to regulate the microfinance industry as a move that was within a state government’s constitutional rights. Simultaneously, he articulated his anxiety about some aspects of the ordinance.

Mukherjee said he talked to Andhra Pradesh chief minister K. Rosaiah about the ordinance and suggested the state tone down its harsher aspects when it is translated into legislation.

Source : livemint.com