Full convertibility on capital account unlikely for few years

India is not looking at full capital account convertibility for the next few years, a senior finance ministry official said.

Raghuram Rajan, the previous Reserve Bank of India governor, had said that the central bank was looking at bringing in capital account convertibility in a few years. Even the International Monetary Fund (IMF), that has advocated such convertibility for decades, has become more cautious about its benefits for developing economies in the recent past, the official said.

“I can only say on capital controls, the IMF which has been espousing for the past few decades the cause of full capital account convertibility… over the last couple of years, has also mentioned the fact that there are a lot of caveats to become fully capital convertible for an economy that is not fully mature,” said Saurabh Garg, joint secretary in the Finance Ministry’s Department of Economic Affairs.

Emerging economy

“We are at a stage where we are still an emerging economy,” Mr. Garg said. “We cannot say that we are a mature or developed economy…we would perhaps not be fully capital convertible in the next few years, but I think that’s the path we have chosen,” the official told participants at an Indo-Canadian Business Chamber meeting here. He added that it was difficult to predict when full convertibility would be considered.

“My hope is that we will get to full capital account convertibility in a short number of years,” Mr. Rajan had said last April. The then minister of state for finance Jayant Sinha had later endorsed the need for the same in order to deepen capital markets and help India play a more meaningful role in the global economy.

Enumerating the steps taken by the government in the past two years to ease access to foreign capital, be it portfolio flows or foreign direct investment, Mr. Garg pointed out that new instruments have also been made available for foreign investors such as rupee-denominated offshore bonds (also known as masala bonds) and alternate investment funds.

“The external commercial borrowings framework was liberalised significantly in December 2015 with the caps (on such borrowings) enhanced. Given the fact that we don’t have full capital account convertibility, there would be a certain amount of time when such caps would remain on the ECB framework,” he said.

Capital controls are used by the state to protect the economy from potential shocks caused by unpredictable capital flows. Capital account convertibility means the freedom to convert a currency for capital transactions and the rupee is not fully convertible on that front yet, though capital flows have been liberalised in recent years.

“Whether we should already be fully capital convertible or not, I can’t say, but because of that, there are constraints and within those constraints, the government is working to ensure greater access to foreign capital with further liberalisation,” the joint secretary said.

Despite the currency risk, the Indian market offers attractive returns to foreign investors, the official pointed out. “The return on government securities is 7 per cent to 8 per cent, so the returns one would expect on equity would be higher. We believe that these kind of returns would continue to be available in India, despite the currency risk, which we hope would reduce as we move further,” he said.

We would perhaps not be fully capital convertible in the next few years, but I think that’s the path we have chosenSaurabh Garg,Joint Secretary, Department

of Economic Affairs