Union Finance Minister Palaniappan Chidambaram, on Wednesday said, the country would continue its gradual approach to opening up its capital account.
“The gradualist approach will continue with regard to the capital account and while opening up to capital flows,” Mr Chidambaram said at an investment conference in London. “India trade openness is already more than many developed countries.” Big capital inflows into Asia’s third largest economy have added to inflationary pressures and complicated monetary policy and currency management by pushing the rupee to nine-month highs against the dollar.
Interest rate hike
However, Mr Chidambaram asserted that the need to increase interest rates further would not arise if inflation is contained at its current rate.
“If inflation is contained at its present level and shows a declining tendency, there is no reason why interest rates should go up,” Mr Chidambaram. “The political tolerance limit appears to be between 4 and 4.5 per cent. I would like inflation to remain there.” “We will be alert, we will take fiscal steps and monetary steps to contain inflation,” Mr Chidambaram said, adding “there will be some blips. We will try to contain inflation between 4 and 4.5 per cent.”
Inflation rate slowed to a 13-month low in the second week of June, and wholesale prices rose 4.28 per cent in the week ended June 9 from a year ago. Economic growth reached 9.4 per cent in the year ended March, while foreign direct investment into the country tripled in the period. This led the rupee, to surge to a nine year high, threatening to hurt exporters.
“We will keep a watch on the rupee,” he said, pointing out that “we will try and help exporters in whatever way we can.” Mr Chidambaram said “if investment picks up sharply, I see no reason why we should not achieve double-digit growth before 2010.” he said. “We don't believe in imposing capital controls on inflows. We will keep an eye on the rupee but our policy is a well regulated market determining the exchange rate.”