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Rupee depreciation contributing to inflationary pressure: Govt

The rupee had touched a record low of 57.32 against the US dollar on June 22

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The government today said depreciation has been contributing to inflationary pressures, even as it is taking steps to contain the price situation.

"The decline in exchange rate value of the rupee makes imports expensive. In situations where the higher cost is passed on to the consumers, it would contribute to inflationary pressures and general price rise," Finance Minister P said in a written reply in the Lok Sabha.

The rupee had touched a record low of 57.32 against the US dollar on June 22. It is is currently trading at 55 levels.

"The government has taken a number of fiscal and administrative measures to check inflation, which resulted in moderation of to around 7-7.5% in the recent months," he said.

The inflation in June came down marginally to 7.25%, from 7.55% in May.

Chidambaram said the decline in the value of rupee was mainly on account of supply-demand imbalance in the domestic forex market.

"This is due to widening trade and current account deficit and slowdown in portfolio flows on account of escalation in euro crisis and strengthening of US dollar in the international market," he said.

He said that while rupee depreciation boosts country's exports, it makes imports costly. "In the present scenario, however, exchange rate depreciation is one of the factors affecting the performance of Indian companies. The other factors are slowdown in global and domestic demand," Chidambaram said.

The government and the RBI had taken a number of steps to facilitate capital inflows and boost exports in order to augment supply of foreign exchange to stem the decline in the exchange rate value of the rupee.

The steps taken include hike in FII investment limit in debt securities, enhancing ceiling for ECBs between 3-5 years maturity, high interest rate ceiling for foreign currency NRI deposit and deregulation of interest rates on rupee denominated NRI deposits.

Besides, manufacturing and infrastructure companies can now avail of ECBs up to a ceiling of USD 10 billion for repayment of outstanding rupee loans towards capital expenditure. Also, the government has announced initiatives to boost exports to USD 360 billion in 2012-13.

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