IMF cautions India against curbs on capital inflows

The International Monetary Fund (IMF) has cautioned India that curbing capital inflows too much could undermine confidence in the country’s very brilliant economy with consequences beyond India itself.

The warning came Friday from the new IMF chief Dominique Strauss-Kahn a day after the former French finance minister took over as the financial institution’s managing director.

It was important to enhance the transparency of the capital flowing into the country but limiting it may not always be good, he said at a press conference. The problem of this kind of thing is it may undermine the confidence in the Indian economy.

It will have an influence certainly on capital inflows but not always a good influence. I think the Indian authorities should think over several times before implementing this kind of instrument, Strauss-Kahn said.

The rupee’s appreciation to record highs this week reflected strong economic fundamentals and a keen interest by foreigners to invest in the country, he said, suggesting: The appreciation of the rupee is driven by a lot of international capital flow to India, and that is the good news.

So an inevitable consequence of that, an unavoidable consequence of that, you have an important inflow of capital to India with a consequence on the rupee, Strauss-Kahn said.

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.

Even if it is not always easy to deal with an appreciation of your currency, as a European I can tell you, nevertheless it reflects good fundamentals, he said.

You 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, he said.

Noting that he had taken the job promising reforms, Strauss-Kahn said: There are definite questions which are at stake for the institution, namely ... what are we going to do in a changing world and how can we do that.

Those changes, he noted, have been brought on by the fast rise of emerging powers such as China and India that are now sources of economic growth and stability while the US and Europe grapple with slowing economic growth and the effects of recent credit and liquidity problems in world markets.

But that shift has never been reflected in the voting power of the 185-member fund, Strauss-Kahn said, suggesting the IMF’s reform had to go beyond simply increasing the stake of emerging economies.

A shift has to be significant from the developed and rich countries to the low-income and emerging market countries, that is clear, he said.

But it is not enough and so on my agenda we cannot stop with only the quota question, the legitimacy of the institution must go much further.

Source - Economic Times