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The current trend of sharp fall in rupee against the US dollar could be reversed if capital flows from overseas pick up, said Dr C. Rangarajan, Chairman of the Prime Minister's Economic Advisory Council (PMEAC).
“I think the behaviour of the rupee is a reflection of the current account deficit (CAD) and the extent of capital flows. It is always possible there could be a mismatch for a temporary period between the CAD and the capital flows. Therefore if capital flows pick up during the year then what we are now seeing can also get reversed,” Dr Rangarajan told reporters on the sidelines of an international conference here on Wednesday.
He noted that the stated policy of the Reserve Bank of India is to prevent volatility in the forex market. “To the extent to which the behaviour can be attributed to volatility then I think the RBI will act. It really is the call of the RBI and it depends on its appreciation of what's happening in the market.”
Dr Rangarajan said that growth was important but quickly added that the monetary authority also has the responsibility to see that the inflation rate comes down. “Even according to the latest number, it is still above 9 per cent. There the concern regarding inflation cannot be taken away from the monetary authority.”
He also did not favour imposition of Tobin tax on capital inflows as it was very difficult to implement and would come in the way of smooth movement of funds. “Tobin tax is too blunt a weapon.”
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