India Doesn't Plan to Restrict Foreign Direct Investment, Mukherjee Says.

India’s government doesn’t need to restrict foreign institutional investment and foreign direct investment at this time, Finance Minister Pranab Mukherjee said after the rupee climbed to near a 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 is the responsibility of the central bank of every country to watch inflows that may make it vulnerable to currency appreciation, and intervene “as and when it is necessary.”

The rupee has gained 5.3 percent 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 Sensitive Index close to a record.

“I don’t think it is going to be too volatile,” Mukherjee said, referring to the inflow of capital. It “has not distorted market sentiment and therefore there is no question of putting any curbs.”

Rupee, Stocks

The rupee fell 0.3 percent to 44.31 against the dollar in Mumbai at 9:10 a.m. today. The Bombay Stock Exchange’s Sensitive Index declined 0.3 percent to 20,246.44.

Mukherjee was speaking at an event organized 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’s Finance Minister Guido Mantega, a delegate to the International Monetary Fund annual meetings in Washington this week, said Sept. 27 there’s already a worldwide “currency war.”

Mukherjee said there is 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 that while “there is inflationary pressure in the system,” he is more watchful of rising food prices.

On the supply side, steps are 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 means “a part of the excess liquidity will be mopped up,” he said. The hope is that by the end of the financial year, the South Asian nation’s inflation rate will be around 6 percent, Mukherjee said.

The 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 have brought the “monetary situation close to normal.” The bank’s reverse repurchase rate is 5 percent and the repurchase rate is 6 percent.

Source : bloomberg.com