Tags:
Journalism of Courage
The RBI has taken a right step 8212; easing capital outflow norms for mutual funds, individuals. But for the wrong reasons 8212; capital account convertibility CAC isn8217;t on the central bank8217;s mind, taming the rupee is. The RBI usually buys up dollars to prevent the rupee from appreciating. But beyond a point the cost of this starts showing up, via inflation. So the RBI is trying to counter dollar inflows by dollar outflows. But dollar outflows should be eased as part of a general plan to open up India more. The RBI, however, wants no one to mention CAC, at least not seriously. So no institution building is being encouraged. It should take, according to economists8217; educated guesses, about two years to have a financial infrastructure for CAC. But the RBI has doubled an individual8217;s annual dollar investment limit to 200,000. If, as is not unlikely, this gets a lot of response, the cumulative effect would resemble a fairly big step towards convertibility, without any regulatory recognition of this fact.
The second problem is that this step is not going to tame the rupee. When domestic stock markets are doing well, when interest rates are high, when there is expectation of further rupee appreciation, more money will flow into India than flow out. Third, what will happen if and when the tide turns and money starts flowing out of India. Will the RBI re-restrict capital outflows on individual, mutual fund accounts? If rupee manipulation remains the prime goal, such a volte face will be attractive. India8217;s policy credibility will considerably suffer, however.
