Finance Minister P. Chidambaram ruled out taxes on foreign institutional investors (FIIs) while saying Thursday that their funds inflows would be watched.

His statement came a day after the central bank said it favoured curbs on such inflows.

"Every country monitors capital flows. We are also watching capital flows to the country," Chidambaram told reporters at a conference here. "But watching capital flows does not mean curbing, capping or taxing foreign institutional investors."

Reserve Bank of India Governor Y.V. Reddy sparked a furore in the capital markets Wednesday when he said in Mumbai that both the quantity and quality of inflows of FIIs needed to be examined.

"A view needs to be taken on capping FII flows. Price-based measures such as taxes could be examined though their effectiveness is arguable," he said while releasing a report of the Indira Gandhi Institute of Development Research.

By Wednesday evening, however, Reddy convened a press conference - after a call from the finance minister - and modified his stand to say he was not in favour of imposing a tax on foreign funds or imposing a cap on their inflows.

Chidambaram told reporters he had spoken with Reddy in the evening and was told the central bank governor's statement was misunderstood.

"Let me tell you there is no proposal for capping or taxing FII inflows," the minister said.

The statement and subsequent clarifications have come at a time when a key share market index has been steadily losing ground, dropping over 575 points, or some eight percent since the beginning of the year.