IMF chief cautions India

Managing director Dominique Strauss-Kahn says further moves to curb capital inflows could undermine confidence in the economy.
International Monetary Fund (IMF) managing director Dominique Strauss-Kahn is concerned that any further moves by India to curb capital inflows could chip away at the confidence in its economy.

ôIt has been said or asked or it has been written that India should implement in one way or another some limits to the capital inflow,ö says Strauss-Kahn, a former French finance minister.

ôThe problem of this kind of thing is it may undermine the confidence on the Indian economy. It will have an influence certainly on capital inflows but not always a good influence,ö he adds.

Strauss-Kahn made the comment at his first news conference on November 2, a day after starting his new post as IMF managing director, when asked about the ôfinancial turbulence (in India) as a result of the declining US dollarö.

Surging capital inflows remains a major concern in India, where finance minister P. Chidambaram has hinted that some new steps may be implemented to ômoderateö the inflows, without elaborating.

IndiaÆs capital markets regulator, the Securities and Exchange Board of India (SEBI), banned in late-October the issue of participatory notes with derivatives as the underlying assets by foreign institutional investors effective immediately. Existing positions were given 18 months to be wound up.

Participatory notes are used by investors, including hedge funds, that aren't registered with the SEBI, to invest in Indian stocks.

Strauss-Kahn says he believes ôthe Indian authorities should think over several timesö before implementing further measures to curb capital inflows.

The rupeeÆs appreciation reflects IndiaÆs strong economic fundamentals and the strong demand to invest in the country, Strauss-Kahn says.

ôThe appreciation of the rupee is driven by a lot of international capital flow to India, and that is the good news. A lot of countries want to invest in India, a lot of companies want to have not only their back office now but much more than that, research labs and so on in India, and that reflects the way the Indian economy has grown and developed during the last years,ö he says.

Strauss-Kahn served as minister of economy, finance and industry of France from June 1997 to November 1999. In that capacity, he managed the launch of the euro.

"Even if it is not always easy to deal with an appreciation of your currency, as a European I can tell you, sorry about that, nevertheless, it reflects good fundamentals," he says. ôYou do not have to do anything which will in one way or another undermine this good luck or the good appreciation, good forecast on your national economy."

What India should work on is trying to ôenhance the transparencyö of those capital inflows and make a distinction between investment flows and speculative flows, he says.
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