Pitching for full capital account convertibility, the Reserve Bank has said that with Indian economy becoming global it would be hard to maintain capital controls for a long period of time. “Greater opening of capital account is inescapable as the Indian economy grows further and becomes global in dimension,” RBI Executive Director G Padmanabhan said in a lecture.
At present, the Indian currency is convertible only on current account, though some capital account transactions are also permitted. Full capital account convertibility means no restrictions on cross border movement of currency. Sooner than later, Padmanabhan said, India will need to get closely integrated with the rest of the world.
“So, India needs to continue moving towards full capital account convertibility. There is simply no escape from it. It is a moot question as to how fast the movement should be. “That will depend on how fast we can meet the most important preconditions like fiscal consolidation, inflation control, low level of NPAs, low and sustainable current account deficit, strengthening of financial markets, prudential supervision of financial institutions, etc. India has already made visible progress on these fronts,” he said.
RBI Governor Raghuram Rajan had last month said that the central bank aims to move towards capital account convertibility as also set up a system where loans could be benchmarked against market rate, alike london Interbank Offered Rate (libor). Following the June 1991 liberalisation, the Government and the RBI have been progressively lifting curbs on capital flows, which saw the FII investment into domestic debt rise to $31 billion as of now. Padmanabhan said: “A truly globalised economy, which the Indian economy is likely to become in the not too distant a future, cannot afford to remain isolated for a very long period of time.”