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September 30, 2002 | 1422 IST
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India to move only gradually to full rupee float

Narayanan Madhavan in Bangalore

India would maintain a cautious approach towards an eventual full float of the rupee, despite a record swell in foreign exchange reserves, a senior Reserve Bank of India official said at the weekend.

Kishori Udeshi, executive director of the Reserve Bank of India, told an annual retreat of foreign exchange dealers in Bangalore that a steady approach was needed to curb volatility and speculation because proper risk management tools were not yet in place.

"The country is committed to a gradual and well calibrated move to capital account convertibility," Udeshi said in a keynote address to the Forex Association of India.

"Convertibility is not a one-time affair. It is a process of evolution and the process is an ongoing one," she added.

India's central bank has faced criticism of being slow in its march to full convertibility after freeing up the current account, which is focused on trade in merchandise and services, about a decade ago.

Critics say the absence of a free two-way flow of capital is slowing investment and commitments by foreign investors.

India's foreign exchange reserves have steadily risen since a balance of payments crisis in 1991 that pushed the nation onto the path of a sweeping but gradual liberalisation programme.

Reserves this month rose above $62.5 billion, a level considered comfortable because it equals about a year's imports.

Managing risks

Udeshi, a veteran with 37 years behind her in the RBI, said a move towards more convertibility demanded efficient methods for conducting two-way flows.

"We have to move together to develop risk-management products beyond the age-old product, the forwards," she said adding that introduction of instruments like rupee-dollar options was under active consideration of the RBI.

The Asian economic crisis of the late 1990s put the already cautious RBI further on guard against fly-by-night or short-term capital flows. RBI has also practised active intervention, inviting the tag of supervising a "managed float" of the rupee.

"The RBI does not target any exchange rate or resist fundamentals," Udeshi said, adding that the central bank only checked "speculative instincts of the few."

She said a totally open capital account convertibility was not necessary and a developing country with underdeveloped financial markets should reserve the right to impose controls if warranted.

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