Capital flows. There is little concern at present about capital flows pushing up the rupee excessively or creating asset price bubbles. The RBI appears comfortable with the currency moving in both directions, and would likely tolerate a stronger rupee as it reduces inflation pressures (indeed, FX intervention has been minimal in recent weeks).

Unless capital inflows exceed the current account deficit by 5/6 times, there would be little concern about capital inflow management. Also, past experiences have shown that capital inflow restrictions are not particularly effective as there are many avenues for circumventing government regulations. More effective implementation of existing regulations would be sufficient in curbing hot money flows.

Eoin Treacy's view In an environment where inflationary pressures are mounting due to the effect on food prices of a poor monsoon and where the durability of the economic recovery remains uncertain, allowing the Rupee to appreciate is a convenient avenue for policy makers reluctant to raise rates too quickly.

The Dollar topped out against the Rupee in March last year and has been trending gradually lower since. It broke below R46 last week and a sustained move above R47 would be required to question potential for further lower to lateral ranging.