RBI for limited capital account openness

As an independent monetary policy is essential to mange the large and complex Indian economy, the country will see a blend of capital account openness and flexibility in the exchange rate, Reserve Bank of India (RBI) Deputy Governor H R Khan has said.

In a speech at an event organised by the SP Jain Institute of Management & Research on January 17, published on the RBI website on Thursday, Khan said, “Our stated objective is to maintain orderliness in the foreign exchange market, even as the exchange rate is market-determined, without any target level or band.”

He said one had to reckon with the so-called impossible trinity of an independent monetary policy, a fixed exchange rate and an open capital account. And, as an independent monetary policy couldn’t be sacrificed, the result would be a combination of some capital account openness and some flexibility in the exchange rate, Khan said.

On the use of derivatives in non-equity segments, he said interest and exchange rates were important macroeconomic variables, with economy-wide implications. The central bank, he added, was responsible for both rates and was mandated to ensure the sound functioning of these markets. Therefore, RBI adopted an approach of cautious gradualism to developments in the cash and derivative segments, he said.