Mar 29 2006
The Rupee Watch
According to Economist, India is slowly openning capital control. I suspect it is the first major economy to do so after AFC. So what it has learned from the AFC and how it will fare in the mid-run will be an interesting case study.
Some facts:
Manmohan Singh, India’s prime minister
Reserve Bank of India (RBI), the central bank.
As long ago as 1997, Palaniappan Chidambaram, then, as now, the finance minister, called capital-account convertibility “a cherished goal”. On his request, the RBI appointed a panel of experts to point a way there.
However, the Asian financial crisis broke out on July 1st, with the devaluation of the Thai baht, and condemned it to gather dust. India weathered that financial storm largely unscathed, for which its capital controls were given some credit.
The shelved report suggested some preconditions to liberalisation: that an inflation target be set; that the government’s big fiscal deficit be contained; and that the financial system be strengthened. It also called for monitoring of India’s balance of payments and the level of its foreign-exchange reserves. (All hit on the right marks: as from my own AFC study. However, the devil is in the details: strengthening financial system and monitoring may be too little too late if capital movement accelerates)
Red flag:
After three years of modest surplus is now in deficit—by as much as 4.6% of GDP in the third quarter of last year
Most interestingly:
India’s large reserves of foreign exchange (now about $137 billion) exceed by about $50 billion the sum of bank deposits held by non-resident Indians, foreign portfolio investment in India and short-term foreign debt. (Something I did not cover during my own research in Thailand or SK cases)