Paulson urges India against capital flow curbs

By David Lawder

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.