The recent rush of foreign capital into the property market in India sent alarm bells ringing in the Finance Ministry. Pre-emptive controls to slow down external debt in Indian realty included a firm ban on foreign borrowings by real estate companies.

While external debt flow into real estate projects has swelled foreign exchange inflows on the one hand, the Indian rupee touched an all time high of 40.67 against the dollar.

To harness the gains from the strong performance of the rupee, which, incidentally, is the fourth best performer against the dollar in the world, foreign inflows had to be curtailed. However, the fallout of the rupee’s gain has been sluggish exports and slackened production. Exports contribute to12% of India’s $854 billion economy.

Textile and gem exporters are worst hit as the rupee gains strength. India’s Trade Minister Kamal Nath would be meeting industry officials next week to explore remedial measures.

India’s inflation rate has hovered around 6 to 7% since September 2006 stabilizing to around 5.44% in the first week of May this year. The rupee appreciated by 0.2% to Rs. 40.67 against the dollar at the same time and could further progress to Rs. 40.55, if experts are to be believed.

The Finance Ministry exercised another precautionary move to curb foreign capital inflows by restricting the costs on overseas loans by 0.5 percentage points.

Service charges, interest on loans and fees would have to be restricted to 150 basis points above the LIBOR (London Interbank Offered rate) to avail of overseas loans.

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