The government will restrict the current account deficit to values between 1.5 and 2 per cent of the gross domestic product (GDP), Reserve Bank of India governor Bimal Jalan said yesterday.
He also said that the countrys banking sector was moving towards universal banking, where there is no distinction between development and commercial banks.
Jalan was speaking after the golden jubilee lecture of the Industrial Finance Corporation of India (IFCI), which was delivered by Joseph Stiglitz on East Asian Crisis and its implication for India.
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Jalan said India has been prudent in keeping the current account deficit below 2 per cent of the GDP, keeping short-term unhedged debt at low levels, not allowing banks to invest in volatile assets, adopting the Basle Committee recommendations of eight per cent capital adequacy, and bringing transparency in the operations of the central bank.
Speaking to newsmen, Jalan said he was not worried about the level the rupee has touched following the nuclear tests.
Earlier, in his lecture, Stiglitz spoke of current account liberalisation and international capital flows.
He said: Capital flows can play an important role in funding domestic investment. Foreign direct investment brings with it not just capital but also knowledge and market access. Our goal should be to encourage stable and productive long-term capital flows, especially foreign direct investment, while discouraging rapid roundtrips of short-term money.
He said the root of the Asian crisis, did not lie in government profligacy, but in private sector decisions that made the economies vulnerable to a sudden withdrawal of confidence. The biggest problems were the misallocation of investment, most notably to speculative real estate, and a risky form of financing, especially borrowing short-term debt on international markets and also, at least in Korea, the high levels of debt relative to equity, Stiglitz said.
The build-up of short-term, unhedged debt left East Asias economies vulnerable to a sudden collapse. Capital outflows and with them, depreciating currencies and falling asset prices, exacerbated the strains on private sector balance sheets which proved self-fulfilling, he said.
He felt that India had weathered the East Asian crisis well and could expect an inflow of international capital. On the extent of the effect of the nuclear tests on the capital inflow, he said: One should never try to guess in the first week of an event.
Stiglitz felt development banks play a crucial role in providing long-term finance. Some projects, especially with long repayment periods and uncertainty about the value of the collateral, will not get funded. Development banks can fill these gaps, he said.