'Fiscal discipline can check inflow-driven rupee rise'

MUMBAI: Fiscal discipline can help contain inflow-driven appreciation of the local currency and reduce the risk of an abrupt stop, according to an IMF analysis. Speaking at a seminar organised by the Bombay Chamber of Commerce and Industry on managing capital inflows, Senior IMF representative for India Joshua Felman said the economic growth tends to rise during times of high capital inflows and then slows down.

Mr Felman pointed out that there have been instances where economies have gone through a currency crisis on account of an abrupt stop in capital inflows. He added that the objective of policy makers should be to avoid an abrupt end to capital flows. Almost all countries follow the same basic strategy of sterilised intervention (purchase dollars and absorb the rupee funds released through sale of bonds). But evidence has shown that the intervention does not stop appreciation.

Though imposing capital inflows might be another answer, even that too have not reduced net capital inflows and the private sector eventually found out a way around the controls. Resources are also wasted in seeking to circumvent controls. Controls also need to raise costs of law-abiding firms since they need to prove that they are complying with the rules.

Other option is fiscal policy. Often it is found that economies tend to increase expenditure as a pro-cyclical policy in the event of strong capital inflows. Only fiscal restraint has proved to contain the appreciation, Mr Felman said.

Earlier speaking at the event, Kotak Mahindra Bank treasurer Mohan Shenoi called for allowing inflows through more channels. While L&T group chief economist Manju Ghodke called for allowing inflows in selective sectors like infrastructure.