Developments in the recent weeks have required India to moderate the flow of funds into the country but the government has no intention of controlling capital flows, Finance Minister P Chidambaram has said.
"Let me assure you we have no intention of imposing controls on capital inflows. Nor do we intend to keep out certain kinds of funds," Chidambaram told the ICICI Securities Annual Investor Conference in New York on Thursday night.
Reacting to the move by stock markets watchdog Securities and Exchange Board of India (SEBI) to control the use of participatory notes by foreign funds, the minister said the move had become necessary following the inflow of foreign funds into India.
"It is common knowledge developed countries have injected a considerable amount of liquidity into their own markets to overcome their own problems. Part of that liquidity has spilled over into India and some other countries," he said.
"There is also evidence foreign investors in some countries may be liquidating their holdings in the securities of those countries and looking for investment opportunities elsewhere," the minister said.
"It has, therefore, become necessary to take some measures to moderate the flow of funds into India," he said, adding: "That is the primary purpose behind the measures announced by SEBI. We believe they will provide some immediate relief."
The market watchdog had said on Tuesday it was intending to impose curbs on the use of participatory notes by foreign funds that help unregistered overseas investors to buy stocks of Indian companies and result in copious inflow of money.
Thirty-four foreign funds have issued participatory notes and SEBI found that their notional value constituted 51.6 per cent of all the assets under the custody of foreign institutional investors.
This had immediately created panic and resulted in a key Indian market index crashing by some 1,700 points within minutes of the start of trading on Wednesday.
The finance minister said steps taken by the regulators would not serve long-term interests and that India needed to quicken the pace of investment, expand production capacities, increase imports and facilitate more capital outflows.
Chidambaram said India continued to receive large sums of money through exports, invisibles, remittances of overseas Indians, foreign direct investment, foreign institutional investment and external commercial borrowing.
"It is indeed a new situation for us, but I am confident that we would be able to manage the situation."
The finance minister said stock markets in India had made enormous progress in developing sophisticated instruments and modern market mechanisms and that 99 per cent of trades were settled in dematerialised form.
"Real strength of Indian securities market lies in the quality of regulation," he said, adding: "We believe that the Indian securities market is among the best regulated in the world today."
He said the growth of the sensitive index (Sensex) of the Bombay Stock Exchange and the Nifty of National Stock Exchange of over 40 per cent year after year has been significantly more than that of the Dow Jones or the Nasdaq.
"The market capitalisation as in December 2006 was at $820 billion, making the Indian securities market the sixth largest in the Asia Pacific region after Japan, China, Hong Kong, Australia and Korea," he said.
"In fact, the market capitalisation of listed securities exceeds the aggregate deposits with the banking system in India. The current market capitalisation is $1,450 billion on the Bombay Stock Exchange."