Reserve Bank of India (RBI) Governor D Subbarao today said the central bank would rework the roadmap for making the rupee fully convertible on capital accounts depending on global economic developments.
The bank was not backing away from full convertibility and we were still traversing the roadmap, Subbarao said at the first international research conference organised by RBI here.
The apex bank will be flexible in using capital control tools to achieve full convertibility. RBI has drafted a plan on fuller capital account convertibility. This includes a three-phase plan extending to 2010-11. The roadmap allows greater movement of capital in and out of the local currency, but progress has been limited so far.
The rupee has been convertible on current account since 1994, meaning it can be changed freely into foreign currency for purposes such as trade-related expenses. But, it cannot be converted freely for activities such as acquiring overseas assets.
Fuller convertibility is expected to facilitate rapid growth through higher investment and improved efficiency in the financial sector through greater competition.
Referring to objectives of the monetary policy, the governor said it could not just focus on inflation given growth concerns. The Indian economy needs to look beyond inflation targeting which is basically a supply-side concern here.
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Large government borrowings influence monetary policy. The central bank also has to worry about growth, development and financial stability concerns.
The emphasis (objectives) of the policy could shift according to circumstances. Due to such shifts, there was less clarity, making it difficult for people to appraise our performance, he said.
Referring to the situation which unfolded after the global financial crisis, Subbarao said the current international monetary system was ignoring global imbalances and, thereby, sowing seeds of the next crisis.
It was incidental that global currency imbalances exploded in the form of a financial crisis and unless it was addressed, the world would be staring at a full-fledged currency crisis or a fiscal crisis, he added.
In a panel discussion, to a pointed question if the international monetary system was found to be inadequate, Subbarao’s answer was a firm “Yes!”
“We have found that the international monetary system was inadequate to deal with global imbalances even though it erupted as a financial crisis, there were structural causes,” Subbarao said.
Asked about India’s role in the global financial system, he said that as and when India got a seat at the table, it would redeem its role responsibly.