Liberalisation of capital account must for Indian economy, says RBI official

As all developed countries are having capital account convertibility, it is inevitable destiny for the developing countries to follow a similar path for development, says the RBI Executive Director.

The Dollar Business Bureau Capital controls have worked well in the case of Indian economy and have protected the economy in times of various currency crises, but, the time has probably come for India to revisit the issue of greater capital account liberalization, said a top official of Reserve Bank of India. “Greater opening of the capital account is inescapable as the Indian economy grows further and becomes global in dimension,” said G Padmanabhan, Executive Director, RBI. Padmanabhan said that since India is likely to become a truly globalised economy in the near future, it cannot afford to remain isolated for a very long period. The official cautioned that as the economy gets more globalized, it will become more difficult to maintain closed capital accounts. “It cannot be resisted over an extended period as that would prove futile and counterproductive,” he said in his address at an event in Mangalore. Increasing openness to the international trade would create opportunities for circumvention of the capital account restrictions through invoicing of trade transactions. And, the increasing sophistication of investors and global financial markets make it much easier to do so, said the official. The free flow of global capital will facilitate more efficient allocation of global pool of savings and their more productive uses. “This, in the perspective of the developing countries, ensures free access to global capital markets, increases available investible resources which augments domestic savings, besides reducing marginal cost of capital and accelerating investment and growth,” he added. As all the developed countries are having capital account convertibility, it is inevitable destiny for the developing countries to follow a similar path for facilitation of the portfolio diversification by investors. “In any case, keeping any restriction for too long is self-defeating as the people end up finding new methods of bypassing that restriction, and therefore, India needs to continue moving towards full capital account convertibility,” he said. However, the pace at which the Indian economy opens its capital account to the foreign investors is dependent on the factors like fiscal consolidation, inflation control, lowering the level of non-performing assets and current account deficit, strengthening of financial markets, and prudential supervision of financial institutions. With efficient policies and robust regulatory framework promoting an efficient financial sector, India has everything in place and need to be strengthened further, the official added.