A senior executive of the Asian Development Bank, says emerging markets such as India needed to take measures to boost long-term foreign direct investment to blunt volatility in exchange rates, and any capital control measures needed to be selective and temporary.
Rajat M Nag, managing director general of the bank, said today while capital flows and exchange rates were likely to be volatile in the short-term, amid ongoing euro-zone debt concerns, India would need to focus on its investment climate by providing better infrastructure, putting in place a coherent manufacturing policy and developing financial markets.
Nag was speaking on the sidelines of the India Economic Summit in Mumbai.
With the rupee down 11 per cent against the US dollar this fiscal year on heavy outflows due to a wave of risk aversion triggering the crisis in Europe, concerns have been exacerbated over high domestic inflation and slowing economic growth.
Investments into India by foreign funds stood at a net $5.46 billion so far in 2011, as against the $38.82 billion invested over the same period last year.
A weakened rupee results in higher import costs especially those of commodities such as crude oil and spurs inflation. Costlier imports also up federal spending on subsidised items such as diesel and cooking fuel, and hurt fiscal targets.