Thursday, June 07, 2007


Indian government is considering setting the restrictions on capital inflows.

The appreciation of the ruple has helpfully tamed the inflation in India, not further posing any inflationary pressures as long as the central bank responsibly follows the guideline monetary policy rules rather than discretion or impeding intervention. The rupee has strengthened over 9% against the greenback since the beginning of the year. Inflation, which peaked at 6.7% in January, is now at 5.06%. To bit the excess liquidity, Reserve Bank of India raised the lending rate from 6.75 to 7 percent following the increase cash reserves helping to tame the inflation. The objective to restrict the investment and separate it on "good" and "bad" is a little bit confusing if property rights are so weakly defined in India, then causing speculations in real estate sector for instance. Price pressures can be tamed by further practicing disinflationary measures and avoiding the protectionism which inevitably stimulates the demand side by disturbing the equlibria price behavior, causing huge excess demand pressures.

It's also good to hear that Indian government's policy remains favorable to attracting foreign direct investment. The Indian economy has risen at a compounded annual growth rate of over 8.5% in the last four years. The question is how to keep it up in the long-run to avoid robust bustling and overheating of the economy. To avoid this, inflationary measures are still needed to be in full preparation to be undertaken by the central bank in cooperation with fiscal authorities.

No comments: