"India will continue to be attractive for capital inflows in 2005. Chances are that FIIs will remain invested," Varadarajan said at a panel discussion on future of the dollar.
"While many think that more than $8 billion of portfolio investment last year was quite large, I believe capital inflows this year will be quite surprising." The entire currency movement in the country would be dictated by capital flows, he said.
The official line in JP Morgan Securities is that the rupee will start depreciating towards 2005 end, but Varadarajan said his assessment was that the Indian currency would appreciate throughout the year.
Indian Council for Research on International Economic Relations director and chief executive Arvind Virmani said improved productivity of Indian economy, which has not been reflected in data yet, would put pressure on rupee to appreciate.
Oxus Investments MD Surjit Bhalla also said there would be pressure on rupee to appreciate.
Varadararajan said US Federal Reserve would continue to increase rate of interest in a measured way this year and some part of the next year to take the rate to four per cent. The Federal Reserve had raised the rate a quarter point to 2.5 per cent on Thursday.
Rising rate will help stabilise the dollar but will still be too low with respect to the current account deficit of the US.