India not yet ready for full rupee convertibility: Khan
Mumbai: India is not yet ready for full capital account convertibility of rupee as the country is an expanding economy and need stability on the external front, Reserve Bank deputy governor H R Khan said.
“The pros and cons of full capital account openness is a contentious issue and in any case, we are not ready for it at this point of time,” he said.
Khan said the backdrop for the foreign exchange market is provided by several factors following the Balance of Payment crisis India faced in 1991. RBI today posted his speech delivered at the Finance Conclave 2015 of a management institute in Mumbai on January 17.
He said the government has allowed full current account convertibility in 1994 and since then it is gradually making rupee convertible on capital account.
The objective, he said, is to maintain orderliness in the foreign exchange market even as the exchange rate is market determined without any target level or band.
“Since no economy of India’s size and complexity can sacrifice its independence in monetary policy, the inevitable consequence is an eclectic combination of some capital account openness and some flexibility in the exchange rate,” he said.
At present, the Indian currency is convertible only on current account, though some capital account transactions are also permitted. Full current account convertibility means no restrictions on cross border movement of currency.
While foreign investors can buy up to USD 81 billion bonds, there is no cap for stock market investments.
Khan further said in a growing economy and with complex financial needs of existing and new firms, the corporate debt market provides a better, more cost effective access to funds.
Among the steps taken to bring in liquidity into the market is introduction of credit derivatives which help bond holders to insure themselves against risk of default, he added.