MUMBAI – India needs to adopt a calibrated approach toward achieving full capital account convertibility, Reserve Bank of India Governor Duvvuri Subbarao said Monday. The country also needs foreign exchange reserves sufficient to buffer against uncertainties, Mr. Subbarao said at an event. The Indian rupee is fully convertible on the current account but is only partially convertible on the capital account as the government wants to shield the economy from sudden outflows of foreign capital in times of crisis. The RBI had appointed a committee to set a road map on fuller capital account convertibility. The committee, headed by former RBI Deputy Governor S.S. Tarapore, had suggested a three-phased approach to making the rupee fully convertible. However, the central bank has maintained it would move gradually to make the rupee fully convertible. Though the South Asian economy hasn't implemented any capital control measures, it is more vulnerable to any sudden stops or reversal of capital inflows than countries with current account surpluses as its foreign exchange reserves mostly comprise borrowed resources. India's foreign exchange reserves were $315.715 billion in the week ended July 1, according to central bank data. India is one of the few emerging market economies to have a persistent current account deficit and is dependent largely on volatile portfolio inflows to fund it, posing macroeconomic risks. "We need to focus on the external sector, which means looking at a sustainable level of current account deficit, a market-determined exchange rate but an exchange rate that is managed by the RBI such that there is no volatility and such that it doesn't militate against the macro-economic stability," Mr. Subbarao said. India's current account deficit was 2.6% of gross domestic product in the fiscal year ended March 31. The RBI allows the exchange rate to be market-determined and intervenes in the foreign exchange market only to smoothen out excessive volatility.
WSJ
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