24/06/2015

iReader

Whyfullcapitalaccountconvertibilityofrupeeisstilladistant
dream
Capitalaccountconvertibilityoftherupeeisadistantdreambecausemacroeconomicparameters
have to be stable before it is implemented. The low current account deficit should be sustained
andthefiscaldeficitneedstobecontained.
Jayant Sinha, minister of state for finance, said on Wednesday India should embrace capital
accountconvertibilityifithastobecomeatopglobaleconomy.Lastweek,ReserveBankofIndia
GovernorRaghuramRajansaid,Myhopeiswewillgettofullcapitalaccountconvertibilityina
shortnumberofyears.
Capitalaccountconvertibilitymeansthefreedomtoconvertrupeesintoforeigncurrencyandback
for capital transactions. India has current account convertibility but not capital account
convertibility.

Whatscapitala/cconvertibility
Freedomtoconvertlocalfinancialassetsintoforeignonesatmarketdeterminedexchangerates
Leadstofreeexchangeofcurrencyatlowerratesandanunrestrictedmobilityofcapital
Beneficialforacountrybecauseinflowofforeigninvestmentincreases
Theflipside,though,isthatitcoulddestabiliseaneconomyduetomassivecapitalflowsinandoutof
thecountry

Wearesurelyonthatpathbutitwilltakeafewmoreyears.Therupeeasacurrencyshouldbe
morefrequentlytradedinternationally,saidDwijendraSrivastava,chiefinvestmentofficer(debt)
atSundaramMutualFund.

Indias external sector was vulnerable till recently, with the current account deficit above the
comfortlevelof2.5percentofthegrossdomesticproduct.Itwas4.2percentofgrossdomestic
product (GDP) in 201112 and rose to 4.7 per cent in 201213. After severe curbs, including
restrictionsonimportofpreciousmetals,thedeficitfellto1.7percentin201314.In201415,it
continuedtostaylow,withthethirdquartershowingadeficitof1.6percent.
Thefiscalsituationremainsfragile.Theturningpointwasin2007,theyearoftheglobalfinancial
crisis.Thefiscaldeficitofthecentralgovernmenthasbeen4.66.5percentinthepastsixyears,
beforefallingto4.1percentin201314.Thegovernmentiscommittedtokeepingthefiscaldeficit
low and the target of 3.9 per cent has been retained for this year. The deficit target will be
progressivelyreducedto3.5andthreepercentin201617and201718,respectively.
Experts believe utmost care should be taken along the path of convertibility. Ajit Ranade, chief
1/2

http://www.businessstandard.com/article/economypolicy/fullcapitalaccountconvertibilityofrupeestilladistantdream115041500906_1.html

24/06/2015

iReader

Experts believe utmost care should be taken along the path of convertibility. Ajit Ranade, chief
economist at the Aditya Birla Group, who was part of an RBI committee on capital account
convertibility in 2006, said many of the recommendations of the committee had been
implemented,includingraisingtheamountsresidentIndianscouldremitabroadandthefacility
fornonresidentstouserupeeaccounts.However,hestillsuggestedcaution.
The International Monetary Fund (IMF) was about to make this as a precondition for
membershipbutthentheEastAsiancrisishappenedandcountrieswhichhadfullconvertibility
likeIndonesia,Thailandetctookabighit.
"Everytimeaglobaleconomicorfinancialcrisishashit,wehaveonlygoneback.Iwouldsaythe
prerequisitesareacomprehensiveregulationcoveringmanagementandmonitoringoftheflows,"
saidAnindyaBanerjee,currencyanalyst,KotakSecurities.
In fact other committee members like A V Rajwade, a risk management consultant are today
completely against it as they believe that in an independent monetary policy a liberal capital
accountandmanagedexchangeratecannotsurvivetogether.
"In my view exchange rates should be managed because they affect the real economy while
floatingexchangeratebenefitsthespeculatorsinthecurrencymarket.Speculatorswantvolatility.
TheIMFisbiasedtowardsliberalcapitalaccountandmarketdeterminedexchangerates.Iamof
a different view because market determined exchange rates can fluctuate widely and they affect
therealeconomy.Jobsarecreatedintherealeconomynotbythespeculators.Speculatorsgain
and the real economy loses. IMFs own research shows that a liberal capital account does not in
anycasehelpsgrowth,"hesaid.

www.businessstandard.com
http://www.businessstandard.com/article/economypolic

y/fullcapitalaccountconvertibilityofrupeestilladista
ntdream115041500906_1.html
http://goo.gl/ffgS

http://www.businessstandard.com/article/economypolicy/fullcapitalaccountconvertibilityofrupeestilladistantdream115041500906_1.html

2/2