High capital flow may destabilise currency, asset prices: IMF

NEW DELHI: International Monetary Fund (IMF) today warned that the surge in capital flows into developing countries could destabilize local currencies and asset prices.

"While capital inflows are generally beneficial, they can raise risks of rapid and potentially destabilizing movements of currencies and asset prices...The resurgence of capital flows to emerging markets, including several in Asia, is presenting policy challenges," IMF Managing Director Dominique Strauss-Kahn said in a speech at a conference in Singapore.

The resurgence reflects the favourable outlook for the region, but also a renewed appetite for higher-risk assets as financial conditions normalise, he said.

However, he said the policy makers have a range of tools available to mitigate the effects of these inflows.

"They include exchange rate appreciation, tighter fiscal policy, and, where appropriate, lower interest rates. In addition, macro-prudential instruments can limit the risk of asset price bubbles," he noted.

Market-based controls on capital inflows can help reduce the volatility of such flows, he said, however, adding these measures are costly and tend to lose effectiveness over time.

India is experiencing a surge in foreign capital inflow powered by initial recovery in the global economy. However, the finance ministry is not concerned at present and says no specific action is required to arrest it.