Admitting that managing capital flows is a challenge for the economy, Reserve Bank India governor YV Reddy on Thursday said India will go for full capital account convertibility once pre-conditions for a liberalised currency regime are fulfilled.
?I am only looking at the timetable by which the pre-conditions are fulfilled. Once the pre-conditions are fulfilled, full capital account convertibility and liberalisation will follow,? Reddy said at the Peterson Institute of International Economics in Washington.
He said with opening of trade, it was becoming difficult to manage capital. ?Purely from a management point of view, it is far easier to manage a liberalised capital account than a capital account controlled. We have to recognise that trade is getting more and more open and if we have more and more open trade, more and more current account, it is very difficult to manage the capital. We have to recognise that,? Reddy said.
India is receiving ?copius? flow of funds in the stock market forcing the market regulator and the central bank to tighten controls. Reddy said before moving to the full capital account convertibility, certain risks have to be tackled.
Foreign investors have been pumping in huge money into the country, driven by expectations of high profits from an economy growing at over 9% per annum and booming equities market. To this date, FIIs have bought about $16.4 billion in Indian stocks. On the back of these massive inflows this year, much higher than a record $10.7 billion in the whole of 2005, the Sensex gained 36% in just 38 sessions beginning 22 August. The benckmark index gained 40% in all of 2005 and 46% in 2006.
The influx of capital inflows has been a cause for concern for the government and RBI. The government has put in various restrictions in the past one year to moderate the amount of capital inflows.
Only on Tuesday, markets regulator Sebi barred FIIs from any fresh issuance of participatory notes in the derivatives segment. It also directed FIIs to wind up their existing PNs position in the derivative segment within 18 months.
?If there are some policies which are so risky,those have to be addressed first,? Reddy said. India allows unrestricted movement of currency on current account for trade and business transactions. It has recently liberalised the capital movement abroad but retains controls on full capital account convertibility.