NEW DELHI: India should continue moving toward making the rupee fully tradable against other currencies even though it isn’t yet ready for full convertibility, a senior central bank official said.
India still needs to do more to control government spending and inflation before its ready for full capital account convertibility, according to a speech by G. Padmanabhan, a Reserve Bank of India (RBI) executive director, that was posted on the central bank’s website on Monday.
“A freely convertible country must have sound, credible, and time consistent macroeconomic policy,” Padmanabhan said in an address to students at a management institute on May 16.
“What does that translate to, operationally? Fiscal prudence and low inflation. Where do we stand in respect of these parameters? I wouldn’t think we are very comfortable here,” he added.
While India allows the rupee to be freely convertible on trade and current accounts, it places restrictions on the capital account, which includes portfolio investments. An advisory panel formed by the Reserve Bank of India in 2006 suggested the currency be made fully convertible in five years.
The rupee, which has tumbled the most after Thailand’s baht this quarter, weakened 0.1 per cent to 63.55 per dollar in Mumbai, according to data compiled by Bloomberg. The yield on the 8.4 per cent bond due in April 2024 declined five basis points to 7.9 per cent.
In his budget unveiled in February, Finance Minister Arun Jaitley said a fiscal deficit target of three per cent will be achieved in the year to March 2018 instead of a year earlier.
The rupee was among currencies that plunged to a record when the Federal Reserve first signalled a reduction in stimulus in May-June 2013. Known as the taper tantrum, the episode pushed India to the brink of a balance-of-payments crisis.
Since then central bank Governor Raghuram Rajan has steadily built up foreign exchange reserves of $352 billion, up 11 per cent from a year ago. By contrast, stockpiles have shrunk in Brazil, Russia and China.
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