MUMBAI, Mar 19 (PTI): Favouring moving towards fuller capital account convertibility in the context of changes in the last two decades, Prime Minister Manmohan Singh yesterday asked Finance Ministry and RBI to work out a roadmap in this regard to attract greater foreign investments.
"Our position, internally and externally, has become far more comfortable. I will request the Finance Minister and the Reserve Bank to revisit the subject (of capital account convertibility) and come out with a roadmap based on current realities," he said while releasing the third volume of the history of RBI here.
Elaborating on the need to move towards capital account convertibility within a transparent framework, Singh said progress in this regard would facilitate the transformation of Mumbai into not only a regional but a global financial centre.
He said there were multiple options possible for such a centre, including as a Special Economic Zone, and "I am confident that we can make steady but firm progress in that direction." He also wanted the state government to provide an enabling environment particularly adequate infrastructure.
After the liberalisation process started in 1991, the rupee has become fully convertible on current account, mainly for trade purposes. But movement on convertibility of rupee for capital purposes has been slow as RBI adopted a cautious approach, especially after the 1997 East Asian currency crisis that led to flight of capital in those countries.
Singh, however, said the cautious approach adopted by the government in moving towards full capital account convertibility has been vindicated in the light of the financial crisis in many emerging economies in late 1990s.
Singh said that the cautious approach of preferring FDI flows to short-term debt was clearly warranted, as capital flows exhibit a highly cyclical pattern.
It is necessary to attract stable component of capital flows while de-emphasising volatile components," he said.
There was a need to build foreign exchange reserves beyond the traditional import cover criterion, he said, adding India's policy of building adequate forex reserves contributed to financial stability and added to the economy's resilience.
India's external sector management has been one of the more notable successes of macroeconomic management, he said.
Singh said the widening current account deficit was not a cause for concern, as it was in consonance with the resurgence in investment demand in the economy.
India's merchandise exports have been recording a robust growth along with exports of services. Non-oil import demand also remained strong, he said, adding the current account deficit was "still in a comfort zone as it can easily be financed through normal capital flows."
Regarding exchange rate policy, the Prime Minister said it was largely market-determined with a focus on managing volatility. It has stood the test of time, he said, adding the Indian experience highlights the need for flexibility and pragmatism in exchange rate management.
Praising the important role played by the central bank of the country (RBI) in carrying forward economic reforms, Singh said the Bank had done well to maintain price and financial stability while contributing to building a robust external sector during a time of great flux.
He, however, wanted the banking system to pay attention to demand of credit by decentralised sector at low cost.
Reserve Bank would have an increasing role in pursuing this national agenda to push up growth, reduce poverty and increase employment, he said.