Attributes the recent pressure on rupee to mismatch between widening current account deficit and declining capital flows

The Chairperson of the Prime Minister's Economic Advisory Council, C. Rangarajan, said on Tuesday that the data on industrial output for October, as captured by the Index of Industrial Production (IIP), “may be revised.”

Addressing a meeting organised by the Bangalore Chamber of Industry and Commerce, Dr. Rangarajan said, “We have asked the Department of Industrial Policy and Promotion in the Ministry of Industries to take another look at the data for October on capital goods output.” “Sampling problems in the IIP,” he said, were noticeable in some other sectors such as pharmaceuticals. He said the slowdown in industrial output in October was mainly attributable to the “fluctuations” in the capital goods sector. He said the Council expects overall growth to be between 7 per cent and 7.25 per cent in 2011-12.

Dr. Rangarajan attributed the recent “pressure on the rupee” to the “mismatch” between the widening current account deficit and the declining capital flows.

He said although foreign direct investment in the current year had increased one-and-a-half times over last year, the deficit had widened to 3.7 per cent of gross domestic product in the first half of 2011-12. “If capital flows increase between January and March 2012, perhaps the situation may improve,” he said.

Observing that the sovereign debt crisis had increased the risk perception of investors, he said, “We need to make foreign (capital) flows more hospitable in the country.”

Dr. Rangarajan justified the Reserve Bank of India's policy stance of using higher policy rates to counter inflation. He urged the industry to see the hike in interest rates as a “correction” of its policy of slashing interest rates by 300 basis points in order to stimulate the economy after the onset of the financial crisis three years ago. “Higher rates are an inevitable consequence of high inflation,” he said. He said inflation was likely to settle at about 7 per cent by March 2012.