Rangarajan in Mumbai on Wednesday. (PTI)

Mumbai, June 6: C. Rangarajan, chairman of the Prime Minister’s Economic Advisory Council, today said that though the overheating of the economy was a cyclical phenomenon, there was still a need to control certain kinds of capital inflows.

Rangarajan, a former governor of the Reserve Bank of India, however, said in moderating the inflows, the country should not send the wrong signals. His comments come at a time when the rupee’s appreciation against the dollar is a cause for concern, particularly among exporters. One of the major reasons for the Indian currency’s rise is the large inflows from foreign investors, including FIIs.

Domestic companies have also raised money from overseas through instruments such as external commercial borrowings.

“Capital flows far exceed our current account deficit. We have to be very careful about how to moderate capital flows. We should not send out wrong signals, but at the same time some kinds of inflows could be discouraged,” Rangarajan said on the sidelines of the Skoch Financial Technologies Summit 2007 here today. However, he did not elaborate on the types of capital that needed to be controlled.

Last month, the Centre made certain changes in its policy on external commercial borrowings to prevent companies from raising money for integrated townships. It also lowered the ceiling on interest rates for such loans to make borrowing difficult for smaller players.

Rangarajan expects the rate of inflation to soften in the coming months. “Yes, to some extent there is a cyclical overheating ... inflation will soften partly because of factors operating in the current year such as the monsoon,” he said. A larger base of the previous year will also help cool down inflation, he added.

He said cyclical overheating occurred when existing capacity was fully utilised in an environment of rising demand.