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'No immediate steps for rupee convertibility on capital account' | Business Standard

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'No immediate steps for rupee convertibility on capital account' | Business Standard

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Finance News Others BS Reporter | New Delhi March 21, 2012 Last Updated at 00:47 IST

'No immediate steps for rupee convertibility on capital account'

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Reserve Bank of India (RBI) on Tuesday said despite the high global crude oil prices, Budget proposals and moderating economic growth would help lower inflation. RBI deputy governor Subir Gokarn said full rupee convertibility could not be an immediate goal; it would be a gradual process. On internationalisation of the rupee, I dont really see it at this point of time an explicit, strategic objective.... I think the focus, at least in the short- to medium-term policy on capital account management, is gradual liberalisation, though with cognisance and action to mitigate the risks. Speaking on the sidelines of an IMF-Icrier event, he said, "Food prices are going to play a role, as we have some stabilisation and even softening, either because of monsoon in the short term or because of government initiatives that were made quite explicit in the Budget. These would also help contain inflation." The Budget had raised the foodgrain productivity allocation for eastern India in the next financial year by Rs 600 crore. It had also announced tax breaks for farm extension activities. Owing to rising food inflation, wholesale price inflation rose from 6.55 per cent in January to 6.93 per cent in February. The high food inflation also affected retail inflation consumer price inflation rose to 8.83 per cent in February from 7.65 per cent in the previous month. Gokarn said RBI policies could not be based on the nascent consumer price inflation index. He added high oil prices play a prominent role, as does the currency movement. However, the moderation in growth may help contain inflation from the demand side. Asked if RBI had enough monetary headroom in the light of hardening global crude oil prices, Gokarn said, Space is the question of how prices itself evolve. I think it's not a meaningful thing in terms of the global crisis, in which commodity prices remain so firm and so rigid. If these prices come down, inflation dynamics change completely and this creates space, he said. Citing the example of the global meltdown in 2008, the deputy governor said, "When we saw the Lehman collapse, inflation was 12.5 per cent and the interest rate was nine per cent. The fiscal situation was much better, but oil prices were $147 (a barrel)." Within weeks of the Lehman collapse, oil prices fell very sharply, he said. This allowed the monetary stance to respond quite aggressively." He said the free-float of exchange rates act as a shock absorber. The rupee is, more or less, convertible on trade account, but not on capital account. With India's current account deficit estimated at 3.6 per cent of the GDP this financial year and inflation at around seven per cent, capital account convertibility could not be resorted to, analysts said. RBI's Tarapore Committee had earlier said for India to go for capital account convertibility, CAD had to be less than three per cent, inflation below five per cent and fiscal deficit at 4.1 per cent of GDP.
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3/17/13

'No immediate steps for rupee convertibility on capital account' | Business Standard

On the diversification of foreign exchange reserves, Gokarn said RBI was looking at Chinese currency RMB in the monetary system. "I don't think we are, at this point, looking at strategic currency diversification. But it is something that would happen as a matter of routine, as the global currency dynamic changes." Growth in India's gross domestic product (GDP) is estimated to fall to 6.9 per cent this financial year from 8.4 per cent in the previous two financial years. Many analysts attributed the decline in growth to RBI's monetary tightening. Crude oil prices have surged to $125 a barrel and the government is expected to raise petrol prices, exerting more pressure on inflation. Read More

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'No immediate steps for rupee convertibility on capital account' | Business Standard

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