New Delhi: The Union government faces challenges in managing the economy because of a strengthening currency and record inflows, finance minister P. Chidambaram said.
“Strong capital inflows have posed significant challenges to macroeconomic management,” Chidambaram said at a meeting of the International Monetary Fund (IMF) in Washington Saturday.
“The rupee, which had been exhibiting two-way movement till recently, has now tended to appreciate significantly.”
India’s market regulator on 16 October proposed restricting the purchase of shares by overseas investors through offshore derivative instruments, such as Participatory Notes (PNs). The steps may fail to cap the rupee’s gains as the pace of economic growth will attract foreign funds, Citigroup Inc. said last week.
“Inflows that are beyond the normal absorptive capacity of economies exert upward pressure on the exchange rates which have implications for competitiveness,” Chidambaram said in a speech, e-mailed by the ministry of finance. “Countries have responded with a combination of measures, including sterilized intervention and active management of the capital account.”
Rupee had its first weekly decline in two months on concern a slide in the nation’s benchmark stock index will spur overseas funds to sell local stocks. The rupee fell to Rs39.73 per dollar at close on 19 October.
Foreign funds have bought a record $19.2 billion of stocks and bonds since January, surpassing previous high of $9.46 billion set in 2005. They invested a net $8.9 billion last year.
“Regulators need to focus greater attention on off-balance sheet transactions of regulated entities,” said Chidambaram.
The Securities & Exchange Board of India (Sebi) will decide on 25 October how to restrict investments made by unregistered investors, including hedge funds, in Indian stocks.