Cap on FII inflows: Reddy proposes, Chidambaram disposes

Our Banking Bureau
13 January 2005

Mumbai: Y V Reddy, governor, Reserve Bank of India (RBI) yesterday evening called upon the government to have an option to impose a ceiling on FII inflows or even taxing them. His statement caused jitters in the investor community and finance minister P Chidambaram had to make a statement claiming that there was no such proposal.

Reddy later addressed a press conference to clarify that the RBI was not in favour of imposing such a ceiling at this stage and that the effectiveness of taxes was arguable.

Observing that the magnitude of FDI / FII flows are tending to be large and volatility has perhaps increased, Reddy said, "A view needs to be taken on the quantity and quality of FII flows. While quotas or ceilings, as practised by certain countries, may not be desirable at this stage, there is merit in our keeping such an option open and exercising it selectively as needed, after due notice to the FIIs."

He said price-based measures such as taxes could be examined though their effectiveness is arguable.

Reddy was speaking at the release of the India Development Report of Indira Gandhi Institute of Development Research. He said there is scope for enhancing quality of flows through a review of policies relating to eligibility for registration as FIIs and assessment of risks involved in flows through hedge funds, participatory notes, sub-accounts, etc. Strict adherence to `know your investor' principle, especially in regard to flows from tax-havens, including beneficial ownership would enhance quality.