US Secretary of the Treasury Henry Paulson yesterday urged India's policymakers to avoid curbs on foreign investment into the financial markets as they could hurt efficiency and become ineffective.
"We understand that Indian officials are concerned that greater capital flows associated with a financial centre could add to inflationary pressures, destabilize domestic financial markets or add to exchange rate volatility," Paulson said at a seminar in Mumbai.
But he said "administrative restrictions tend to inhibit efficiency and lose their effectiveness over time. I encourage India to continue to liberalize such restrictions."
India's market regulator last week sought to limit a surge in overseas investment in the Indian stock market by phasing out a system that allowed some investors such as hedge funds to buy shares anonymously.
The regulator said funds now have 18 months to register with Indian authorities to continue to be able to buy shares.
Foreign investors have helped drive a stock market boom in India, pumping in about US$18 billion this year alone, pushing the benchmark Sensex up by nearly 40 percent over the same period.
"As recent experience in the region shows, administrative restrictions are blunt instruments and can have unintended consequences," Paulson told a gathering, which included Indian Minister of Finance P. Chidambaram.
Paulson was set to meet India's stock regulatory chief M. Damodaran and officials at the central bank yesterday as part of talks aimed at promoting Mumbai as an international financial center.
But the crowded city of nearly 20 million people mirrors other parts of India, which needs an estimated US$488 billion in the next five years to build infrastructure, Chidambaram said.
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