Safeguards needed for full rupee convertibility: Jalan

Mumbai, March 21 | Updated: Mar 22 2006, 05:30am hrs
The country needs safeguards as it moves towards fuller rupee convertibility, to avoid unbridled flows in short-term foreign debt, which could unsettle the economy, former Reserve Bank of India governor Bimal Jalan said on Tuesday.

Mr Jalan, who was the governor when for the first time greater convertibility was being studied in 1997, said that it was an opportune moment for the country to take a fresh look at relaxing the controls. But he said it was imperative to have strong foreign exchange reserves, lower import tariffs and a competitive economy before moving towards a full float of the currency.

There have to be safeguards like restraining short-term foreign debt flows, Mr Jalan, currently a member of Parliament, said in an interview.

Experience shows that they can become very volatile and although India can do with more short-term debt, we have to be very careful.

A central bank panel is to map out by the end of July a route to greater rupee convertibility, a step which could prove to be the countrys biggest economic development since sweeping reforms in the early 1990s.

We should continue to have separate regulation for banks, Mr Jalan said. The regulatory network would have to remain. Subsidies for agriculture have to be there. National boundaries do not disappear when capital becomes fully convertible.

The rupee is currently fully convertible on the current account, a broad measure of the movement in goods and services. But on the capital account the rupee can not be freely converted, such as for acquiring assets overseas through shares or real estate.

India would limit overseas corporate borrowing in 2006-07 to $15 billion a fraction of its reserves and foreigners are not allowed to hold more than $1.5 billion in corporate debt and $2 billion in federal bonds. They cannot own more than 5% of a domestic bank.

A move towards full convertibility was abandoned in 2000 in the wake of the 1997-1998 Asia financial crisis and after failing to meet some key economic objectives for the move.