‘India should not rush into capital a/c convertibility’

HYDERABAD: Four wise men ��� three ex-governors and one serving governor of the Reserve Bank of India ��� came together on Friday to brain-storm on the challenges for the central bank as economies are hoping to come out of the woods after the global financial turmoil. They agreed on many prescriptions and disagreed on some though the disagreements were more in terms of nuances.

At RBI���s platinum jubilee celebrations, M Narasimham, C Rangarajan and YV Reddy, all former governors and the serving governor D Subbarao saw excess liquidity, over-leveraging and poor regulation as the root cause of the global financial crisis. While Mr Reddy talked about the present and the past legacy of excess liquidity, others felt that past-legacy posed less of a problem.

The panellists broadly concurred that India should not rush into capital account convertibility, meaning freedom to convert local financial assets into foreign financial assets and vice-versa, at market determined rates of exchange.
Mr Reddy was more conservative as he questioned the merits of capital account convertibility. Others were of the view that the macro economic situation, costs and benefits need to be weighed before transition. ���Capital account convertibility is more of a process. We need to go forward, but slowly,��� said Mr Subbarao.

The panellists echoed a similar view on the creation of international financial centres, saying the timing was not right yet.

The RBI governor listed out four challenges: solving the tension between fiscal and monetary policies, defining the mandate of central banks and reforming the regulatory architecture, getting the right balance between regulation and liberalisation and conducting monetary policy in a globalised world.

But Mr Rangarajan saw price stability as the primary objective of the central bank. ���Hard inflation targeting specifying a rate may not be acceptable in an economy like ours where supply side constraints are apparent. However, soft inflation targeting that refers to maintaining a degree of price stability should be the dominant objective of monetary policy,��� he said.

Mr Subbarao was of the view that a minimalist focus on inflation targeting would not deliver macro economic or financial stability. Over-regulation could thwart financial innovation and suppress growth stimulus. A judgement therefore should be made between the costs and benefits of regulation, he said.

Mr Narasimham made out a case for a coordination panel between regulators with RBI at the helm to guide regulation and prevent regulatory arbitrage. The panellists also voiced concerns on the timing and mode of exit policy by the central bank as and when the crisis is over to mop up excess liquidity.