India faces a problem of huge capital inflow and needs appropriate regulations as well as risk management systems to avoid any potential shocks, Finance Minister P Chidambaram said on Tuesday.
"Today in India, we face a problem of enormous capital flows. This is a completely new situation for us. We welcome capital but we must learn how to manage capital, how to absorb capital," he told industry captains at Fortune Global Forum.
"We need to put in a place appropriate regulations, we have to put in place risk management systems," he added. India has seen foreign institutional investments surge to a record $17 billion this year.
In October alone, FIIs have pumped in nearly $8 billion. The flows soared after the US Federal Reserve cut a key rate on September 18. During April-July this fiscal, $6.6 billion of FDI has come into India against $3.7 billion in the same period a year ago.
India targets to attract $30 billion FDI this year against $15.7 billion last year. Huge inflow of capital has pushed up forex reserves to $261 billion, and also led to an over 12 per cent rise in rupee against the dollar since January, hitting exports.
Referring to the subprime mortgage crisis in the US that rattled financial markets worldwide in July and August, Chidambaram said perhaps one of the reasons why the crisis hit the US economy was because regulation fell behind innovation.
"We don't want regulation to fall behind innovation... Regulation and derisking the system have to be one step ahead of innovation and human inventiveness... we cannot afford shocks, (and) to avoid shocks regulations we must stay one step ahead of innovation," he said.
Chidambaram also said India's investment to GDP ratio would grow from 35 per cent to 40 per cent in the next 4-5 years with growing workforce and savings.
