IMF Says Capital Controls Can Slow Investment Flows In India, Brazil

The International Monetary Fund said Thursday that capital controls were appropriate measures that countries such as India and Brazil could use to choke the flow of investments threatening to damage their economies.

“Capital controls are certainly part of the tool kit…[and] the range of measures countries can consider” IMF spokeswoman Caroline Atkinson said when asked about the fund’s recommendations for India published Wednesday.

Asked if the IMF approved of capital-control measures being adopted by Brazil, Ms. Atkinson said: “We see those measures as macroprudential measures aimed at strengthening the banking system in Brazil in the face of big capital inflows, and those can be an appropriate part of the tool kit.”

But earlier Thursday, an IMF official in New Delhi said India doesn’t need to take any new measures yet to curb capital inflows.

As part of the IMF’s regular surveillance, the fund said Wednesday that if the rupee were to become too strong, India also could intervene in the foreign-exchange market or take what it called “macroprudential” measures, without elaborating.

For the IMF, blessing capital controls is a reversal of its previous stance. Wednesday, the fund said it planned to begin developing guidelines for beneficial use of such controls.

As a consequence of the financial crisis, low interest rates in advanced economies and high yields in emerging economies, floods of “hot money” across borders have not only helped fuel growth in developing nations, but also threaten to overheat their economies.