labels: rbi, economy - general
India competitiveness could be undermined by capital flows: Rakesh news
14 June 2007

Large capital inflows could result in overvaluation of India's currency and erode competitiveness of traditional and goods sectors in the long term.

In a paper, Capital Account Liberalisation and Conduct of Monetary Policy: The Indian Experience - Paper Presented by Dr. Rakesh Mohan for a Bank of France seminar in Paris, Rakesh Mohan, deputy governor of the Reserve Bank of India (RBI) said large remittances and a sustained spurt in software exports capital inflows "have the potential for possible overvaluation of the currency and the resultant erosion of long-term competitiveness of other traditional and goods sectors," Mohan says in his paper.

India is part of the way through a three-phase, five-year plan towards greater capital account convertibility and opening up the capital account meant market participants needed to be better able to absorb greater volatility and shocks.

"In the context of progress towards further capital account convertibility, the market participants are going to be faced with increased risks on multiple accounts: volatility in capital flows, volatility in asset prices, increased contagion and state of ability of legacy institutions in managing risks."

Speaking to RBI staff in Mumbai, today Christian Noyer, governor, Banque de France, said, "In contrast with the French experience which took place in the 1980s, the Indian process of financial liberalisation takes place in a context of intense globalisation and accelerated innovation.

"It is gradual but successful and it is no surprise that India was one of the first countries to participate voluntarily in the IMF Financial Stability Assessment Program (FSAP). In my view, the progressive and transparent character of this process is fundamental to guarantee that a country reaps the full benefits of its integration into the world economy.

"The lessons that can be drawn from a comparison with the French experience may seem limited since, in the 1980s, France was facing capital outflows, whereas emerging economies are now often facing speculative capital inflows. However, I believe that, while the challenge has become more demanding, successful financial liberalisation for EMEs still rests on the same two key conditions that applied to France:

  • Building a resilient domestic financial system while or before opening the capital account.
  • Shaping appropriate institutions and policies.
(Read more in Emerging Market Economies by Christian Noyer, governor, Banque de France)

also see : The Challenges of Financial Liberalisation for
The Challenges of Financial Liberalisation for

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India competitiveness could be undermined by capital flows: Rakesh