Need Rules To Regulate Capital Flows: FM

NEW DELHI: Finance Minister P Chidambaram on Tuesday said India is facing the problem of enormous capital inflows and indicated the government may take steps to monitor and regulate portfolio investments by foreign entities.

"Today in India, we face a problem of enormous capital flows. This is a completely new situation for us. We welcome capital but we must learn how to manage capital, how to absorb capital," he told captains of industry at the Fortune Global Forum here.

"We need to put in a place approapriate regulations, we have to put in place risk management systems," he added.

India, the world's second-fastest growing major economy, has been foreign institutional investments surge to a record 17 billion dollars this year. In October alone, FIIs have pumped in nearly 8 billion dollars. The flows soared particularly after the US Federal Reserve cut a key interest rate on September 18.

Referring to the subprime mortgage crisis in the US that rattled financial markets worldwide in July and August, Chidambaram said perhaps one of the reasons why the crisis hit the US economy was because regulation fell behind innovation.

"We don't want regulation to fall behind innovation... Regulation and derisking the system have to be one step ahead of innovation and human inventiveness... we cannot afford shocks, (and) to avoid shocks regulations we must stay one step ahead of innovation," he said.

The finance minister also expressed concern over the growing protectionist tendency among some advanced nations in matters related to global trade.

"Although through globalisation of trade in recent years, our exports have grown on an average 20 per cent in a year, but there are some aspects that worry us," he said, adding while tariff barriers were being reduced, non-tariff barriers were being erected.

Chidambaram also said India's investment to GDP ratio has gone up to 35 per cent. With growing workforce and savings, the ratio would increase to 40 per cent in 4-5 years, he added.