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India needs to continue to move towards making the rupee more convertible for capital transactions by foreign investors, said Reserve Bank of India Executive Director G Padmanabhan, amid a growing debate over the merits of a freely floating currency.
Padmanabhan, who is set to retire from the central bank this month, added India could not afford to remain isolated from global financial systems with existing caps on capital account transactions, according to a speech he delivered at an educational institute on May 16.
The rupee > is not fully convertible for capital account transactions, though it is freely convertible for current account transactions, such as trade-related payments.
The pace of further opening up its capital account to foreign investors should depend on factors such as fiscal consolidation, inflation, bad loans, and strength of financial markets, Padmanabhan said in a speech, published on the RBI's website on Monday.
"While there are risks associated with full capital account convertibility, resisting liberalisation over an extended period may prove futile and counterproductive," Padmanabhan said.
Although foreign investors face no restrictions in buying Indian shares, they cannot buy more than $81 billion of debt.
Last month, the RBI allowed companies to raise rupee debt offshore, a small step seen towards further opening up the rupee float while Governor Raghuram Rajan at a separate event called for full convertibility of the rupee in "a short number of years".
Padmanabhan said there were risks to further opening up the capital account, such as contagion from global market disturbances, but he said effective procedures for controlling capital flows and a robust regulatory framework would help prevent large distortions in the financial system.
"There are of course risks, but we need to accept these risks and move forward boldly while controlling the risks as far as practicable."
