MUMBAI, SEPT 6: The financial turmoil in Asia seems to have put a temporary stop to the financial sector reforms in India. Seeing the writing on the wall, Reserve Bank of India (RBI) Governor Bimal Jalan has already given enough indications that financial sector reforms are reversible, and virtually supported the existing controls on the capital account convertibility.The new thinking in India is in line with the general approach in many South-east Asian nations which are now raring to go back to a controlled regime. Malaysia has already announced major currency controls and stopped trading of its currency (ringgit) outside the country. Russia, which saw its rouble tumble more than 50 per cent after a devaluation last month, is also moving towards more controls. China which retained controls has managed to withstand the currency crisis so far.While most of the South-east Asian currencies have fallen by 50-100 per cent in the last one year, the rupee also declined by nearly 20 per cent from the 35.70level a year ago to the 42.55 level now. Upsetting the calculations of many, Asian currencies are still showing high volatility. Currency analysts and foreign investors are predicting further fall in the value of the rupee.The RBI Annual Report has warned the process of financial sector reforms are reversible, albeit temporarily, as it is essential to respond to market developments home and abroad. ``While this may at times give rise to discontinuities in the implementation of the pre-determined reform programme.. macro economic considerations dictate that stance of policies is adjusted periodically to the changing ground realities,'' the RBI said.When the rupee recently plunged below the 43.50 level, the central bank announced several structural changes and hiked the cash reserve ratio (CRR). As suggested by the Narasimham panel and agreed by the government, CRR is supposed to be reduced over a period of time. In fact, the Tarapore panel which suggested a road map to full convertibility on thecapital account had put forward several preconditions involving inflation and current account deficit before making the rupee fully afloat. Now Tarapore proposals are unlikely to be considered for the time being.The central bank now supports that the existing restriction on capital account convertibility by saying, ``The continuing capital account restrictions in India have played a part in reducing possibilities of strong capital outflows.'' The Malaysian decision to bring back sweeping capital controls and chances of other Asian nations following suit have created nervousness among policy makers in India as well.In 1996 capital was flowing into Asia at the rate of about $ 100 billion a year; by the second half of 1997 it was flowing out at about the same rate,'' says economist Paul Krugmen. This is true about India also. Indian stock markets used to get huge foreign institutional investment till last year. But in the last one year there has been an outflow of FII funds. FIIs pulled out nearly $ 108million from the Indian markets in August.The report expressed concern over the ``recent international developments'' which require ``continuous watch and alert policy responses''. It has also made it clear that maintaining external stability is of paramount importance and the ``policy objective is to maintain a higher level of forex reserves in relation to current account position keeping in view uncertain international developments''.Analysts feel that the RBI and the government are unlikely to hurry towards more reforms in view of the ongoing turbulence in other nations. Former Finance Secretary Montek Singh Ahluwalia was quoted saying, ``As India never gave its own citizens and banks open access to foreign money, it is insulated from the tendency of financial markets to push currencies to extremes.'' This means even an ardent supporter of free-market policies like Ahluwalia has turned cautious.
