Paulson urges India against capital flow curbs

File photo of U.S. Treasury Secretary Henry Paulson in central London, September 17, 2007. Paulson said on Monday India is mostly on the right path to cut risks from increased foreign investment, but warned that limiting capital flows would hurt the country's competitiveness.

MUMBAI (Reuters) - U.S. Treasury Secretary Henry Paulson said on Monday India is mostly on the right path to cut risks from increased foreign investment, but warned that limiting capital flows would hurt the country's competitiveness.

Restrictions on capital flows were "blunt instruments" that could have unintended consequences, Paulson said at an infrastructure conference in Mumbai.

"I urge my Indian colleagues to continue, and accelerate, their efforts to liberalize the economy and develop the financial system - to assure that the vibrancy and growth that the Indian economy now enjoys continues well into the future," Paulson said.

Last week, India announced restrictions on anonymous investment flows into Indian shares, which have put upward pressure on the rupee in recent months and sent the stock market to record highs.

Speaking at the same conference, Finance Minister Palaniappan Chidambaram said India's concern was about inflows from unregistered entities, especially unregulated ones.

"So long as funds come in after registrations, they are welcome to do so," Chidambaram said.

Paulson said limits on debt and equity financing, and asset allocation restrictions on financial institutions were impediments to putting resources to their most productive use.

He understood Indian officials were concerned that as Mumbai gains strength as a major financial centre, increased capital flows could increase inflationary pressures, destabilize domestic financial markets or add to exchange rate volatility.

"For the most part, India is on the right path to reduce these risks. India has allowed greater flexibility in the exchange rate in recent months, and the appreciation in the rupee has helped to reduce inflationary pressures," Paulson said.

CHINA FOCUS

In a question-and-answer session, Paulson said China was increasingly the focus of protectionist sentiment around the world and should move quicker towards a market-determined yuan exchange rate.

"Very often around the world, if someone doesn't like globalization, the face they put on it is the face of China," the U.S. Treasury Secretary said.

Paulson said he was pleased to see that India had let market forces operate in setting the value of the rupee. The rupee has risen more than 12 percent against the dollar this year.

Regarding China's tightly controlled yuan currency, or the renminbi, he said China may not be ready for a fully market-determined exchange rate, but that Beijing needed to move more quickly in that direction.

"In near term they need to let the renminbi appreciate more quickly so that it reflects economic fundamentals."

LONG-TERM FUNDS

India could take a number of steps to become more competitive in the long term, such as reducing requirements that financial institutions hold large amounts of government debt, reducing requirements for banks to provide credit to priority sectors, and removing various restrictions and caps on foreign investment.

Paulson said Wall Street stood ready to help India build Mumbai into a major capital market centre, particularly in the development of a domestic bond market that would provide long-term financing for much-needed infrastructure development.

He said the United States supported India's ambitious plans to attract public-private partnerships to help finance its infrastructure needs, but said this would require transparent and independent regulatory frameworks, where government entities do not act as both regulator and services providers.

"Investors, especially those who must make long-term commitments as in most infrastructure projects, want certainty in their operating environments," Paulson said.