Well move towards convertibility gradually,says Reserve Bank

Reserve Bank of India governor D Subbarao on Wednesday indicated that the country would continue to move towards liberalising the capital account convertibility....

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Reserve Bank of India governor D Subbarao on Wednesday indicated that the country would continue to move towards liberalising the capital account convertibility that allows the rupee to be converted into any currency and vice versa anywhere after revisiting the road map to reflect the lessons of the crisis.

According to him,India has followed a consistent policy on allowing capital inflows in general and on capital account management in particular. Our position is that capital account convertibility is not a stand-alone objective but a means for higher and stable growth. We believe our economy should traverse towards capital convertibility along a gradual path the path itself being recalibrated on a dynamic basis in response to domestic and global developments, he said at a high-level conference on The International Monetary System jointly organised by the Swiss National Bank and the IMF in Zurich.

On a Tobin type tax,he said,We have not so far imposed nor are we contemplating one. However,it needs reiterating that no policy instrument is clearly off the table and our choice of instruments will be determined by the context.

Among the components of capital flows,we prefer long term flows to short-term flows and non-debt flows to debt flows. The logic for that is self-evident. Our policy on equity flows has been quite liberal,and in sharp contrast to other EMEs which liberalised and then reversed the liberalization when flows became volatile,our policy has been quite stable, Subbarao said.

Historically,India has used policy levers on the debt side of the flows to manage volatility. Contrary to popular perception,we have used both quantity and price based variables to moderate debt flows. There is a ceiling on the extent of FII investment in sovereign and corporate debt quantity variable and there is also a withholding tax price variable. External commercial borrowings ECB by corporates come in through both an automatic route and an approval route, he said. ECB flows under both the automatic and approval routes are moderated by interest rate ceilings a price variable and those under the automatic route through an additional ceiling on total quantity a quantity variable. Non-Resident Indians NRI deposits are monitored through an interest rate ceiling,a price variable.

Indias exchange rate policy is not guided by a fixed or pre-announced target or band,Subbarao said. Our policy has been to intervene in the market to manage excessive volatility and disruptions to the macroeconomic situation. This volatility centric approach to exchange rate also stems from the source of volatility which is capital flows. Despite not having a fully open capital account,we have experienced large volatility in capital flows as the data for last four years suggests. The exchange rate of the Indian rupee vis-à-vis US dollar appreciated when there were large capital inflows; and it depreciated when the capital inflows thinned out. The two way movement is a clear demarcation of our flexible exchange rate policy, the RBI chief said.

The exchange rate policy is said to have imposed some costs. Last fiscal 2009/10,the rupee appreciated by 13 per cent in nominal terms but by as much as 19 per cent in real terms because of the inflation differential between us and our trading partners. This has implications for our external competitiveness at a time when world trade is recovering and concerns about protectionism are resurfacing, he said,adding,Also,if we have a flexible exchange rate,and if other countries which are our trading partners or competitors for the same export markets have a fixed exchange rate,we get disadvantaged.