India is confident of gaining control over record inflows of capital that have fuelled advances in the rupee and the benchmark index.
The government expects the economy to expand “close to 9%” this year, although rising food and oil prices are a cause for concern, finance minister Palaniappan Chidambaram said at a conference on Friday.
The Reserve Bank of India (RBI) is yet to take a clear view on capital flows, deputy governor Rakesh Mohan had said on Thursday.
The rupee has gained 12% since January and the key share index crossed 20,000 points for the first time, leading to some capital controls.
In August, the finance ministry imposed curbs on companies seeking to borrow from overseas and the Securities and Exchange Board of India (Sebi) on 25 October tightened rules on overseas investment in shares through the so-called participatory notes (PNs).
Sebi said overseas funds will have to register before investing in securities linked to Indian equities or sell their holdings within 18 months. “We cannot afford shocks, we cannot afford turbulence in our markets,” Chidambaram said. “Therefore, we have been cautious and calibrated in opening our financial markets.”
Last month, RBI ordered lenders to set aside more reserves for the fourth time this year to prevent “unacceptably high” inflows of foreign money from reigniting inflation. It raised the ratio of deposits that lenders must put aside by half a point to 7.5%, up from 5.25% at the start of the year.
“Oil prices have risen to new highs and they are expected to further rise,” Chidambaram said. “It is important to factor in these changes and adjust policies so that inflation doesn’t go out of hand.”
Prime Minister Manmohan Singh had said on 17 November his government has controlled inflation amid a record surge in oil prices. The government hasn’t allowed refiners to raise prices this year on concern it will accelerate inflation.
Singh’s Congress-led ruling coalition has cut taxes while RBI raised interest rates and reduced the cash in the banking system to curb inflation, which rose to a two-year high in January. Inflation has slowed since then, holding near a five-year low as the government subsidizes fuel to protect consumers from record crude oil prices before elections in Gujarat and Himachal Pradesh next month.
RBI has described the current inflation rate as “suppressed” because it does not reflect the rise in oil price to records.
India, Asia’s third largest economy, has grown an average 8.6% since 2004, the fastest pace since independence in 1947. Among the major world economies, it’s the second fastest pace after China.
Noting that India largely remains unaffected by the global turbulence in financial markets due to US subprime crisis, Chidambaram said that there could be some moderation in exports demand.