Jamal Mecklai: Aa jaon maidan mein!

MARKET MANIAC

It has been clear for some time now that India is already a significant player in the global market" Mr Bush's recent smiling visit and any number of large cross-border deals (in both directions) are evidence enough. To add some quantitative meat to that conclusion, a recent study has shown that the Indian economy is the fourth-largest in the world on a PPP basis, and, much more significantly, in 2005, India's growth was the fourth-largest contributor to world GDP growth in absolute terms.

Clearly, the Prime Minister's announcement on capital account convertibility last month" and the RBI's immediate follow-up" is simply the government acknowledging what the whole world already knows. Importantly, given that Dr Singh was the architect of the financial sector reforms, including achieving the current account convertibility of the rupee, his signal carries much more credibility than would that from any other Prime Minister.

While the announcement has unsurprisingly raised cries of feigned terror from politicians (both within and without the government), the highly technical nature of the subject will make it very difficult for the opposition to build any sort of credible case. And make no mistake, the Indian electorate has evolved to a point where you can't pull the wool over their eyes any more.

In any event, the market, now that it has smelled the roses, will not wait. Clearly, the die is cast"the PM would not have made such an announcement unless the issue had already been discussed in considerable detail with the RBI. And, in fact, a little deeper observation of the foreign exchange market suggests that the process has already been joined for some time now. Over the past six or eight months, the RBI has become much more tolerant of higher rupee volatility-a 10- or 15-paise movement in a day is not that uncommon, and, importantly, does not trigger RBI intervention. From a level of around 2 per cent in 2005 (and about 3 per cent in 2004), the average volatility of the rupee has been 5 per cent since September 2005 and 6 per cent since January 2006. Equally importantly, the market is much more stable at this higher level of volatility, with spikes in volatility now much less frequent.

In the context of the PM's announcement, it seems clear that the RBI has been preparing its clients" i.e. banks and companies" for the newer, more volatile world on the cards. This may also explain why the central bank has been so lax in making necessary small adjustments of deregulation, many of which are no-brainers"if you are planning a big change, it doesn't make sense to keep tinkering at the edges.

But what would be the impact of capital account convertibility? What would it mean for the country?

Well, first of all, it will result in lowering the cost of capital for Indian companies, since they would be able to access capital anywhere in the world. Since markets would be more volatile, it would increase risk; but since markets would also be much, much deeper, they would enable companies to manage the risk much better than they are able to today. The bottom line is that Indian companies would become much more competitive. Of course, there would be a learning period"global business practices can be quite stringent and there could be all sorts of heretofore unconsidered risks that companies will face, and we will doubtless suffer a few shocks.

On balance, though, capital account convertibility will give a real boost to the evolution of Indian multinationals.

A reduced risk-adjusted cost of capital will also increase the speed of development of Indian infrastructure, which will doubtless boost economic growth to, perhaps, double-digit levels. The sustainability of this sort of growth levels, to some extent, depends on the global economic environment, which continues to confound any naysayer. But India's particular advantage is its huge domestic economy, which is just waking up. In any event, for the foreseeable future, Indian growth will always be higher than the most optimistic estimate.

But, before we start stacking up the cases of Dom Perignon, there is a lot of work to be done"Tarapore II is just starting its work.

First of all, accounting standards will need to be more synchronised with global norms. On its part, the Institute of Chartered Accountants has shocked everybody with its new track and field performance. Guidelines that took years to percolate out of their dusty rooms now come forth in months, which is great, but this aspect needs to further accelerate.

Any number of meaningless glitches in market access need to be eliminated. But this is a relatively simple matter. The RBI knows exactly what has to be done; they've been pondering these glitches for years.

A rather more contentious issue, though, could be the fact that we have not yet had a "dry run" of real interest rate volatility for banks to be able to get a feel of this crucial part of the new world. While the RBI has been going on about risk-based supervision, thus far there are few public sector banks that run their businesses with a live-time market focus. Clearly, we need to see a lot of aggressive movement on the deregulation of the interest rate markets. The next monetary policy"April 18"should bring some big action.

In fact, the next few months"say, till the end of the year" will see a lot of changes, a lot of volatility. Which means more risk. And, of course, more opportunity.

Aa jaon maidan mein!