'No Tobin Tax now, but proposal not off the table'

The Reserve Bank of India (RBI) on Tuesday said it was not considering imposition of Tobin Tax at present, but the proposal was not off the table.

“We have not so far imposed a Tobin-type tax, nor are we contemplating one. However, it needs reiterating that no policy instrument is clearly off the table and our choice of instruments will be determined by the context,” RBI Governor D Subbarao said at the Peterson Institute for International Economics in Washington yesterday. His speech was released on the central bank’s website on Tuesday.

At the same time, the governor said the central bank was not planning changes in the policy on overseas flow into the debt segment and the exchange rate policy. Besides, he said India would liberalise the capital account gradually.

The governor’s statements came in the wake of recent suggestions for imposition of Tobin Tax, which is levied on short-term cross-border currency transactions aimed at discouraging excessive capital flows. Suggestions have come in the wake of surging capital inflows to emerging market economies following the financial crisis.

Economies such as India and China have recovered from the crisis faster, offer better growth prospects and better interest rates, resulting in higher inflows. So far in 2010, foreign institutional investors have pumped in Rs 53,112 crore in Indian equity (Rs 28,252 crore) and debt (Rs 24,860 crore) markets.

While listing out the arguments in favour and against the imposition of Tobin Tax, Subbarao said, “In India, given the overall thrust of policy, we are quite agnostic on the choice of different instruments.”

Subbarao, however, dismissed suggestions that RBI should resort to inflation targeting for a variety of reasons. First, he said, a central bank in an emerging economy couldn’t drive a single goal, oblivious of the larger development context. Two, inflation targeting cannot do much to tame supply-side inflation, except as a line of defence in an extreme situation. He pointed out that food items, which have a weight of up to 70 per cent in various consumer price indices, were subject to large supply shocks.

The governor also said with India following multiple measures of inflation, “which inflation index do we target?”