Sound capital controls may have insulated India from the contagion effect of various currency crises in the past, but greater opening of the capital account is inescapable as the economy grows further and becomes global in dimension, said G Padmanabhan, executive director, Reserve Bank of India.
Full capital account convertibility means no restrictions on cross-border movement of currency.
“Keeping any restriction for too long is self defeating as people end up finding new methods of bypassing that restriction. So, India needs to continue moving towards full capital account convertibility. There is simply no escape from it,” he said in his address at a management institute in Mangalore.
Padmanabhan, who is set to retire from the central bank this month, pointed out that India cannot afford to remain isolated for a very long time as it will become a truly globalised economy soon.
Last month, RBI governor Raghuram Rajan raised the issue of capital account convertibility while responding to a question by a student in an event in Pune. “My hope is we will get to full capital convertibility in a short number of years,” he said.
A few days later, minister of state for finance Jayant Sinha also spoke about capital account convertibility.
Padmanabhan said the pace of opening up capital accounts further would depend on fiscal consolidation, inflation control, low level of non-performing assets, low and sustainable current account deficit, strengthening of financial markets and prudential supervision of financial institutions. India had made “visible progress” on these fronts, he added.