India should work closely with G20 countries to take collective steps to contain excessive flow of foreign capital, the Economic Survey suggested on Friday.
"We will have to keep open the options of having to take corrective measures, should these flows affect us adversely. The most important step in this context is to work with the G-20 countries and try to figure out collective decision rules, whereby each country tries to intervene minimally in the flow of capital," the pre-Budget Survey said.
It further said: "When it does intervene, it does so taking into account the externalities on other nations."
Till such a plan of coordinated action is worked out successfully, a nation has to be prepared to adopt policy measures on its own, it added.
It said periodic surge in capital flows could lead to problem of absorptive capacity in the economy, fuelling asset price bubbles, currency appreciation and stoking inflation.
"The challenge is in managing such surge in capital flows," it added.
Overall capital flows into India this fiscal year have been the highest in the country's history.
"This has been caused largely by a groundswell of money coming through the foreign institutional investor route, in response to the robust performance of the Indian economy, but also because of low interest rates and returns in general in industrialised nations," it added.
It further said during the year, there was also "currency competition", with China allegedly holding its exchange rate at what was believed to be a depreciated level.
The Survey notes that the net capital flows at $36.7 billion in April-September, 2010 were higher as compared to $23 billion in April-September, 2009.
"All components showed improvement with the exception of FDI and banking capital in the first half of 2010-11. Net FDI into India moderated to $5.3 billion as against $12.3 billion in April-September, 2009," it said.
Portfolio investment, mainly FII inflows, however, witnessed large net inflows of $23.8 billion ($17.9 billion in April-September, 2009).
"Despite significant increase in capital inflows, accretion to reserves during April-September 2010 was lower, mainly due to more than doubling of current account deficit compared to last year.
In FY11, India's foreign exchange reserves have increased to $299.2 billion till January-end, 2011.