MUMBAI (Reuters) - The Reserve Bank of India (RBI) governor said on Saturday the bank was not backing away from moves towards full capital account convertibility and would rework its plans depending on global economic developments.
India has been cautious on financial sector liberalisation and a move towards fuller capital account convertibility after the global financial crisis hit Asia’s third-largest economy harder than expected.
“Are you backing down from the capital account convertibility roadmap? Answer I believe we are not. We are still traversing the roadmap but we will re-work the roadmap depending on global developments,” RBI Governor Duvvuri Subbarao told a central bankers’ conference in Mumbai.
“What capital control tools will we use until we achieve full convertibility? I believe we will use them flexibly as we have used them in the past.”
India has drafted a plan on fuller capital account convertibility. This includes a three-phase plan extending to 2010/11 and would allow greater movement of capital in and out of the local currency, but progress has been limited so far.
The rupee has been convertible on current account since 1994, meaning it can be changed freely into foreign currency for purposes like trade-related expenses. But it cannot be converted freely for activities like acquiring overseas assets.
Fuller convertibility is expected to facilitate rapid growth through higher investment and improve efficiency in the financial sector through greater competition.
Subbarao also said large government borrowing influenced monetary policy.
The RBI is widely expected to raise lending rates at its April review after it surprised markets with a stronger-than-expected rise in banks’ cash reserve requirements.
Analysts say the RBI seems to be concerned about government finances and that the Feb. 26 annual federal budget would influence the course of its monetary policy.
But some believe that higher-than-expected government borrowing in the budget might keep the central bank from raising rates as it would push up borrowing costs.
Subbarao also said banks needed to transmit policy signals or the central bank’s ability to contain inflation gets impaired. Banks, saddled with costly deposits, did not match the RBI’s 425 basis point cut in rates between October 2008 and April 2009.
Writing by Neha D'silva; Editing by Ron Popeski