'Capital inflows do not require intervention now'

The government is monitoring the rupee’s fall against the US dollar, but the stage for intervention has not yet arrived, according to Finance Minister Pranab Mukherjee.

The minister said he had discussed the movement of the rupee with Reserve Bank of India Governor D Subbarao in Washington, DC. Both officials are in the American capital for the annual IMF-World Bank meetings. Talking to reporters in Washington, DC, Mukherjee said, “We will watch the situation for some time. As and when intervention will be required, that will be considered at that stage.”

The finance minister is expected to leave Washington, DC, earlier than scheduled to go to New York to meet Prime Minister Manmohan Singh, where the latter is attending the United Nations General Assembly. Their meeting will reportedly deal with the latest revelation related to the 2G scandal – the finance ministry note that has created a political crisis in India centred around Home Minister P Chidambaram. However, Mukherjee declined to say anything about the issue at a press briefing that was brought forward on Saturday afternoon from Sunday morning.

"I told you that my question is only addressed to that (2G). What is to be told there, I will tell it there (in India), not now," he said.

The minister said volatility in capital flows was not a concern at this time. “I’m not worried about it because our current account deficit can absorb the type of flow which is taking place,” he said, and added, “But if it goes beyond a point and if we find that we don’t have that absorption capacity, then we will have to take steps. But that stage has not yet come.”

He also pointed to growing inflows of foreign direct investment (FDI). “Fortunately, compared to last year the FDI flow has increased substantially. I think it is almost a 133 per cent step up in the last four-five months,” he said.

Answering a question from Business Standard about inflation, the minister said the primary driver of inflation in India was not too much demand, but constraints on the supply side. He said the steady tightening of interest rates by the RBI over the past 15 months had mainly addressed the huge fiscal expansion caused by the stimulus packages in the wake of the 2008 global economic crisis.

“But food inflation is substantially due to the supply constraints. Therefore we have to remove those constraints,” he said. Mukherjee pointed to some short-term measures that have helped, including steps announced by the government to encourage cultivation of pulses. He said this had succeeded in reducing the gap between supply and demand of pulses from six million tonnes to two million tonnes. He said another short-term measure, that is traditionally taken is to allow imports, but that strategy was not effective now as global prices of commodities are also high.

On the global front, he said high commodity and fuel prices have led to inflation, affecting growth and destabilizing the fiscal consolidation process in several emerging economies. He also said the volatility of capital flows have worsened the situation, and blamed the capital flows partly on the “easing out policy by some of the advanced countries.”