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Wary RBI alert on capital flows

Foreign funds may boost growth story, but are likely to fan inflation, reports Mahua Venkatesh.

india Updated: Aug 23, 2011 00:45 IST
Mahua Venkatesh
Mahua Venkatesh
Hindustan Times

With the level of capital inflows into the country from foreign institutional investors (FIIs) expected to swell significantly as the financial crisis deepens in the US and Eurozone, the Reserve Bank of India (RBI) is taking no chances and keeping a close watch on the developments.

While a surge in overseas portfolio would mean an increased confidence in the Indian growth story, it would fan inflation, which is already a cause for concern.

"The central bank is not very comfortable with the idea of a surge in capital inflows at this stage as it is already battling high inflation," a government source told HT on the condition of anonymity. "However, an increase in the inflows is imminent and the situation is being closely monitored."

“Hot money” or FII investment is considered volatile as it be could be pulled out anytime.

However, in India, a large chunk of the FII investment is also used to finance the current account deficit.

FIIs invested a net $39 billion or Rs 75,500 crore in 2010 against Rs 83,423 crore in 2009.

Finance minister Pranab Mukherjee had said that the financial crisis in the West would result in increased capital inflows, which would keep the growth story intact.

First Published: Aug 22, 2011 22:50 IST