India not planning capital controls, says Chidambaram

CAMBRIDGE — India has no plans to impose controls on capital flows but a recent surge of funds into the country requires some measures to ward off a stock market bubble, the country’s finance minister said on Thursday.

By (Reuters)

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Published: Sat 20 Oct 2007, 8:55 AM

Last updated: Sat 4 Apr 2015, 11:28 PM

In remarks in New York and Boston, Palaniappan Chidambaram said India aimed to maintain a competitive exchange rate without hurting foreign investment.

“We are trying to ward off a bubble in the stock market. It is not often that the index rises from 18,000 to 19,000 in four trading sessions,” Chidambaram told students at his alma mater, Harvard University in Cambridge, Massachusetts.

India’s stock market watchdog, the Securities and Exchange Board of India (SEBI), proposed late on Tuesday there should be urgent curbs on the flow of foreign funds into shares through instruments known as participatory notes.

“These measures will bring immediate relief,” the finance minister said. “But it is not our intention to impose controls on capital flows. Nor is it our intention to keep out certain kinds of capital flows. Our immediate goal is to moderate inflows of capital.”

Two or three weeks ago, as much $11 billion flowed into India in a single week, he said.

“This is a completely new situation for us. And therefore we have taken some new measures. I think these measures will work,” he said.

The Mumbai stock market has charged to record highs this year. Since the U.S. Federal Reserve cut interest rates on September 18, the benchmark index has gained 15 per cent.

The portfolio inflows have helped propel the rupee to its highest in 9-1/2 years against the dollar. The central bank intervenes to keep it down but the extra rupees which then flow into circulation have been complicating monetary policy.

Participatory notes are used by foreign investors, including hedge funds, to gain exposure to India’s markets without registering with its authorities.

SEBI’s announcement initially sent shares down 9 per cent when they opened the next day but they recovered most of the losses after both the watchdog and Chidambaram reassured investors they were not banning the instruments altogether. Earlier in New York on Thursday, Chidambaram said in a televised speech that developed countries had injected a lot of liquidity into their own markets to overcome domestic problems and some of that money had spilled into India.

The partially convertible rupee hit 39.27 per dollar last week, its strongest level since March 1998, but was back at 39.77/78 by Thursday’s close.

Chidambaram said India was not selecting a level for the market or the rupee but the currency’s very rapid appreciation had put the exchange rate “just outside the comfort zone.”

“The market will find its level, rupee will find its level,” he said.

“The goal is to maintain a competitive exchange rate, without hurting foreign investments in India.”

Shares fell nearly 4 per cent on Thursday after an early rally to a record high, with traders citing selling by foreign funds worried about the proposed curbs on some inflows although Chidambaram blamed the fall on a “motivated rumour.”

He said SEBI had been in consultation with foreign institutional investors for 10 days before it came out with this week’s proposals.

The watchdog has given until October 20 for any responses and Chidambaram said on Wednesday the proposals were expected to take effect on October 25, with or without modifications.

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