Maintaining a cautious approach on the country's commitment to fuller convertibility of the rupee, the Economic Survey 2007-08 on Thursday underlined the need to bring it about in a "gradual, sequenced and calibrated" manner.
The survey, tabled in Parliament by Finance Minister P Chidambaram, however, agreed with critics that the end-use conditions on external commercial borrowings (ECBs) could be construed as a hindrance towards achieving the objective.
But at the same time it said end-use conditions on ECBs were not fully liberalised in the first place and had been periodically reviewed and regulated.
The end-use conditions on ECBs were notified in August 2007 and these modified the pre-existing controls or limits by only prioritising the use of rupee expenditure beyond a certain limit.
Expressing concern over the "excess of net capital inflows over the current account deficit," the survey said it posed newer problems in macroeconomic management.
Foreign direct investment (FDI), which reached $ 23 billion in 2006-07, had already grossed over $ 11.2 billion in the first six months of the current fiscal till September 2007. It is "preponderantly of equity variety".
Apparently alarmed by the recent turbulence in the equity market, the survey expressed concern over the risks arising from surges in short-term and more volatile capital flows.
It said in view of the rapid rise in foreign exchange reserves and rupee appreciation, the fiscal cost of sterilisation of flows has mounted and supplementary demand for grants consumed Rs 8,200 crore (Rs 82 billion) so far in the current fiscal.
As against forex flows of Rs 2,02,235 crore and purchase of another Rs 1,18,994 crore by the Reserve Bank in 2006-07, the total sterilisation cost was Rs 91,974 crore.
In the first six months of current fiscal, the Central bank had already purchased forex valued at Rs 1,58,206 crore and cost of sterilisation mounted to Rs 1,13,696 crore, the survey added.