RPT-UPDATE 1-India watching rupee, capital flows-finmin official

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By Rajkumar Ray

NEW DELHI, Oct 23 (Reuters) - A senior Indian finance ministry official said on Thursday that capital inflows needed to be increased and steps would be taken as necessary, a day after the central bank raised the limit on firms overseas borrowings.

Economic affairs secretary Ashok Chawla also said he expected volatility in the rupee, which hit a record low against the dollar on Thursday, would decline as liquidity improved.

He said inflation would fall to around 9.5 to 10 percent by the end of 2008. After he spoke, data showed annual inflation moderated to 11.07 percent on Oct. 11 from 11.44 percent a week earlier.

"We are watching the situation and the RBI is doing their job. We hope these measures will have a positive impact," Chawla told reporters.

On Wednesday night, the central bank raised the ceiling on overseas borrowing by domestic firms to $500 million from $100 million and increased the ceiling on interest rates that comapnies could pay for these loans. [ID:nBOM350892].

The partially convertible rupee INR=IN fell to a record low of 49.86 in early deals on Thursday before heavy central bank intervention propped it up to 49.80/81 per dollar.

At its low, it had fallen nearly 21 percent so far this year.

"Once there is some easing of liquidity pressures, the expectation is that it will be less volatile," he said.

Chawla said the growth prospects of the economy remained good despite the global financial crisis. (Writing by Swati Bhat; Editing by John Mair)