India doesn’t plan to impose more curbs on the inflows of overseas capital, which have driven the currency to the highest in almost a decade and the benchmark stock index to a record.

Minister of state for finance Pavan Kumar Bansal

Overseas investors have bought a record $18.8 billion (about Rs73,884 crore) of stocks and bonds this year, according to market regulator Securities and Exchange Board of India (Sebi).

That helped the rupee gain 12.5% since January and pushed the stock index above 20,000 points for the first time, leading to the imposition of capital controls.

“Policymakers have a difficult job at hand to manage the holy trinity of exchange rate, interest rates and inflation," said V. Ravi Kumar, senior director of treasury at IDFC Ltd in Mumbai.

“Concerns over the torrent of inflows still remain."

The Reserve Bank of India (RBI) stepped up dollar purchases to prevent the rupee from gaining further and hurting exporters after it recorded the biggest annual gain in more than three decades.

“A depreciation of the US dollar against major currencies and increased capital flows have led to appreciation of the rupee," Bansal said.

RBI intervened in the foreign exchange market and “such appreciation was moderated," he said in a separate reply.

The Bombay Stock Exchange’s benchmark Sensitive Index, or Sensex, fell 352.56 points, or 1.8%, to close at 19,280.8 on Tuesday.

Exchange rate

The rupee surged as high as 39 against the dollar on 9 November, the highest intra-day level since 20 February 1998. It has retreated since and traded at 39.36 per dollar in Mumbai, according to data compiled by Bloomberg.

“The exchange rate is market determined," Bansal said. “Excess volatility in foreign exchange markets is contained through intervention as and when necessary" and through the sale of bonds, he said.

Sebi had on 25 October tightened rules on overseas investment in shares through so-called participatory notes.

Under the new rules, foreign investors can only issue offshore derivatives linked to stocks up to a limit of 40% of their assets under custody as of 30 September.

India in August imposed curbs on companies seeking to borrow from overseas. Companies that borrow more than $20 million overseas can’t remit the proceeds to India, while the central bank’s permission will be needed to repatriate funds up to $20 million, the finance ministry had said on 7 August.

Inflation, reserves

“There is no direct one-to-one correspondence between the levels of capital flows and inflation," Bansal said. “The Reserve Bank of India undertakes sterilization operations to prevent excessive monetary growth that might have a bearing on inflation."

India’s inflation held near a five-year low in the week ended 3 November from a year earlier. Wholesale prices rose 3.11% in the week, compared with a 2.97% gain in the previous week.

RBI, while maintaining its policy rates at a five-and-a-half-year high last month, unexpectedly ordered lenders to set aside more reserves for the fourth time this year to contain inflation.

“Containment of inflation remains high on the agenda of the government," Bansal said in another written reply.

The moderation in the rate of inflation is due to improvements in the supply of commodities, including wheat and sugar, and the strengthening of the rupee, which led to a decline in the prices of imported goods, he said.