FinMin advisor against restrictions on capital flows

The country should welcome capital inflows and not place any direct restriction on such funds, Chief Economic Adviser to the Finance Ministry Kaushik Basu said.

“My own view is that we should welcome capital flows that come in and then use a variety of policies, and we know a whole range of them to handle that (inflows) as well as possible, but not use blocks and checks on them directly,” Basu said while speaking on the sidelines of an event organised by the Bombay Chamber of Commerce.

There have been talks on the need for some restrictions on capital flows as foreign fund inflow has been lifting the rupee to new multi-month highs and impacting exports.

When asked about his opinion on the lower-than-anticipated February industrial production numbers, Basu said IIP numbers were on expected lines and that growth in last quarter would still be closer to 8.5 per cent. The economic growth is driven by the manufacturing sector and also by a slight revival in the agricultural sector.

Revival in the services sector, however, could take longer as they were largely dependent on economic up tick in the advanced nations. According to data released today, the index of industrial production grew 15.1 per cent in February compared with 16.7 per cent in January and 0.2 per cent a year ago. Most market participants had expected industrial production growth at 16 per cent. The Central Statistical Organisation will detail the gross domestic product (GDP) estimate for January-March and for 2009-10 on May 31. Basu expects the inflation in March to be high, but said it is difficult to speculate on likely monetary action from Reserve Bank of India.

The commerce and industry ministry will release the inflation figure for March Thursday.

He, however, stressed that RBI could not be too late in taking steps to tame inflation since monetary policy works with a lag. RBI had last hiked the reverse repo and repo rate by 25 basis points each on March 19 only days after February inflation rose to 9.89 per cent crossing RBI’s estimate of 8.5 per cent by end of March.