Business Standard

Don’t miss the latest developments in business and finance.

Rupee convertibility to be in sync with other sectors: RBI

Bs_logoImage
BS Reporter Mumbai
Last Updated : Jan 21 2013 | 1:47 AM IST

Hinting at a “gradualist” approach to financial globalisation, Reserve Bank of India (RBI) Governor D Subbarao today said the pace of capital account liberalisation in India would hinge on progress in other sectors.

Safeguarding financial stability remains a top priority for the apex bank.

“We view capital account liberalisation as a process and not an event. The extent of opening is contingent upon progress in other sectors,” Subbarao said in his welcome remarks at CD Deshmukh Memorial Lecture here.

Lord Adrian B Turner, chairman of the UK’s Financial Services Authority (FSA), delivered the lecture.

The policy framework encouraged equity flows, especially direct investment flows, but debt flows were subject to restrictions and fine-tuned periodically, he added.

The exchange rate is largely market-determined and RBI intervenes in the foreign exchange market in times of excessive volatility.

More From This Section

RBI has been proactive in adopting a counter-cyclical approach to financial regulation and India’s banking system has remained remarkably well-capitalised with capital-to-risk weighted asset ratio (CRAR) much above the minimum prescribed under Basel-II norms.

Despite the global financial crisis, the asset quality of banks has remained sound, though there has been a slight deterioration in recent months. RBI recognised that banks should build provisioning and capital buffers in good times which could be used for absorbing losses in the downturn, he said.

Recently, banks were asked to ensure that the provisioning coverage ratio (the ratio of provisioning to gross non-performing assets) was not less than 70 per cent, he added.

Subbarao said the crisis, which erupted with the collapse of Lehman Brothers in September 2008, spread rapidly thereafter. The impact of the crisis on India was, however, relatively muted.

“Largely driven by the then intellectually fashionable decoupling theory, there was dismay in India that we were hit by the crisis.” Subbarao said.

The governor said first there was surprise that we were hit by a crisis with origins in the banking system, even though Indian banks and the entire financial system had minimal exposure to tainted assets. Second, there was concern that we were hit by global recession even though our export sector, at 15 per cent of gross domestic product, was relatively small, he said.

“India was hit by the crisis because we were more globally integrated than we tend to acknowledge. We were impacted through all channels, the financial channel, the real sector channel and the confidence channel,” he added.

Capital controls relevant for emerging economies: FSA chief

Curbs on short-term capital inflows, which tend to be speculative in nature, may have an important role to play in emerging economies, according to Lord Adrian Turner, chief of UK’s Financial Services Authority (FSA).

Deliberating against financial transactions with little economic value such as carry trade, Turner said a reduction in trading activity in these markets was an acceptable consequence.

“Financial transaction taxes have theoretical attractions, which need to be balanced against practical implementation challenges. Increases in capital requirements against trading activity are a key priority, and leverage constraints need to be applicable to non-bank as well as bank trading activities,” he said. Drawing parallels between the current crisis and the Asian crisis of 1997-98, FSA chief said the common thread was the disproportionate increase in financial activity in relation to real economic activity in the period preceding the crises. Pointing out that the Indian regulator had proactively taken counter-cyclical measures to contain bubbles in specific sectors, Turner said that developed countries should also consider similar measures.

Also Read

First Published: Feb 16 2010 | 12:14 AM IST

Next Story