Convertibility Seen On Track, But May Proceed Slowly

Indias financial markets are not mature enough to face the rupees full float by 2000, but the prescriptions of an official committee will go a long way to prepare the markets for the event, bankers and analysts said.

I dont think the financial markets are mature enough for capital account convertibility, Kishor Chaukar, managing director of ICICI Securities and Finance Company, the Indian affiliate of US investment bank, JP Morgan.

But we are not infants either. We are running late compared to others, Chaukar said. We have little choice. Some bankers said they did not expect capital account convertibility for at least five years.

 

Even the SBI, the countrys largest bank and leading player in the inter-bank foreign exchange market, still has to bring together its treasury operations, bankers said.

The banks have to develop expertise in a range of new financial instruments as capital account convertibility nears. Banks will enter into more off-balance-sheet activities. like swaps, futures and options, said Rajan Govil, analyst at SBC B & K Securities. If new instruments are introduced and regulations are not in place you could be in big trouble potentially, he said.

But Govil and others said India could take many small steps towards readying its markets while waiting for the right macroeconomic situation to free the rupee on the capital account. The fundamental economic parameters do not inspire the required confidence and institutionalisation of the markets is still at an incipient stage, Shashank Chaudhary, analyst at Khandwala Securities said. Even current account convertibility is not easy, Kiran Nanda, economist at Gujarat Ambuja Cements said, referring to bureaucratic hurdles on offshore remittances.

Firms say they are not sure what is in store for them following the advent of capital account convertibility. We dont know whether we will have a level playing field compared to multinationals with larger scale of production and deeper pockets, said a finance director of a chemicals firm.

Keeping inflation in the 3.0-5.0 per cent band will be very difficult in a growing economy when 50 years of distortions are not corrected, economist Kiran Nanda said, referring to the countrys rising subsidy bill on petroleum and fertilisers. (Reuter)

Inflation, as measured by the latest wholesale price index, was at six per cent according to the latest data and most analysts expect inflation to rise in the coming months on the back of a long-awaited hike in subsidised petroleum product prices.

Cutting down subsidies will stoke inflation, analysts said. Recognising the difficulty, the convertibility report seeks greater autonomy for the RBI to control inflation. It wants a medium term inflation target to be approved by parliament, after which the central bank would be free to use instruments in its command to achieve the target. The major concern now remains stability of inflation, said Ramesh Sobti, India chief executive of ABN-AMRO Bank. Once everyone is convinced about stable inflation, capital convertibility should not be difficult, he said. (Reuter)