So how to slow down inflow of foreign funds?
By The Associated Press (June 7, 2007)
India's economy is still showing signs of overheating in some areas despite a drop in overall inflation in recent weeks, the prime minister's top economic adviser said Wednesday.
C. Rangarajan, who heads the Indian prime minister's Economic Advisory Council, said he was also concerned over the surge in foreign money coming into India, complicating efforts by monetary authorities to cool the economy.
The Indian economy has grown more than 8.5 percent annually over the past four years, boosting incomes and consumption, and in the process driving up demand and prices. In some areas, such as real estate, prices have nearly doubled in two years, stoking fears that the economy might be overheating.
"We are seeing some signs of cyclical overheating," Rangarajan told reporters on the sidelines of a business conference in Mumbai. "This happens in all economies in a period of rapid economic growth when capacities tend to get utilized fully and demand pressures persist."
Rangarajan said, however, that he expected companies across the country to boost investment and expand production capacity.
According to latest government data, the inflation rate based on wholesale prices eased to 5.06 percent in the week ended May 19 from 5.27 percent in the preceding week. Through the January-March quarter, the inflation rate stayed above 6 percent.
The current levels are still high compared to economies that share the same features with India.
"Inflation rate could soften because of a higher base last year," Rangarajan said.
India's rapid economic expansion has lured foreign companies, but their increased investment has also fueled inflation by adding more to the money in circulation.
"We have to be very careful on how to moderate capital flows," he said. "We should not send out wrong signals, but at the same time, some flows can be discouraged."
He didn't name areas where capital flows should be discouraged, but analysts and government officials often point to the stock market and real estate, which have seen a huge surge in foreign investment and bank lending.
The flow of foreign capital has helped the country's foreign exchange reserves rise to a record $205 billion and latest data showed that money supply grew 20.2 percent in the two weeks ended May 11 from the same period a year earlier.