RBI’s hands tied, need FIIs: PM advisor

Arguing that the uptick in inflation has "considerably diminished" the Reserve Bank of India's legroom to intervene in the forex market to prop up the plunging rupee, the Prime Minister's top economic advisor has called for "more proactive steps" to attract capital flows as the more viable way out of the crisis.

"We need to take measures to encourage capital flows. Foreign direct investment will be influenced by better growth prospects. We need to allay some of the concerns of FIIs to encourage investment in equity and debt," the PM's Economic Advisory Council chairman C Rangarajan told The Indian Express.

The former RBI governor met Prime Minister Manmohan Singh last evening in a stock-taking exercise on the rupee's slide. "The meeting largely focused on a number of macro-economic issues, including the falling rupee. The central issue was how to move to a higher growth trajectory but maintain the fiscal deficit at the budgeted level," a senior official involved in the exercise said.

While partly attributing the fall in the rupee to the ongoing eurozone crisis, Rangarajan said that the mismatch between the current account deficit and capital outflows is also putting pressure on the currency.

The wholesale price index-based inflation rose to 7.23 per cent in April, sharply higher than March's 6.89 per cent. In April, the central bank had cut key rates by 50 basis points, thereby reversing the rate hike cycle it started in March 2010.

The rupee fell to a new intra-day low of 54.60 against the dollar today as capital outflows continued. But market players attributed RBI's intervention as being key in cushioning against a steeper fall, with the rupee finally closing at 54.47.

With foreign investors worried after the controversial budget proposals, the finance ministry is hoping to shore up sentiment by looking at measures such as diesel price deregulation after the Parliament session ends next week. It's also trying to get more state-run firms to list and try to revive the stalled proposal on allowing FDI in multi-brand retail.

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