Precaution is the word on capital account convertibility

Mumbai, Aug 30 | Updated: Aug 31 2006, 05:30am hrs
Nearly a month after the submission of capital account convertibility road map, the Reserve bank of India (RBI) has indicated that a judgmental view needs to be taken whether and when a country has reached the threshold. In the annual report, RBI stated that so far India has chosen to proceed cautiously and in a gradual manner, calibrating the pace of capital account liberalisation with underlying macroeconomic developments, the state of readiness of the domestic financial system and the dynamics of international financial markets.

In the case of financial integration, a threshold in terms of preparedness and resilience of the economy is important for a country to get full benefits. A judgmental view needs to be taken whether and when a country has reached the threshold and the financial integration should be approached cautiously, preferably within the framework of a plausible roadmap that is drawn up by embodying the country-specific context and institutional features, said RBI. Further it also said that the experience so far has shown that the Indian approach to financial integration has stood the test of time.

Commenting ahead, RBI said, At this stage, the optimism generated by impressive macroeconomic performance accompanied with stability has given rise to pressures for significantly accelerating the pace of external financial liberalisation. It is essential to take into account the risks associated with it while resetting an accelerated pace of a gradualist approach.

The apex bank stated that the overall approach to the management of Indias foreign exchange reserves in recent years reflects the changing composition of the balance of payments and the liquidity risks associated with different types of flows and other requirements.