The Hindu Business Line : Forex instability, no; volatility, yes: Jalan

The Rajya Sabha MP and former Reserve Bank of India (RBI) Governor, Mr Bimal Jalan, believes that capital account convertibility (CAC) need not necessarily mean instability in the forex market. He adds that capital outflow is an unlikely problem under strong economic conditions. However, safeguards are essential to protect the economy, he says.

Excerpts from CNBC-TV18's exclusive interview with Mr Bimal Jalan:

What kind of a roadmap can we expect from the RBI? Will it be a phased approach or an aggressive role?

It is difficult to guess now; they have just formed the panel with an expert group. But definitely there will be some phased approach without doubt.

How much by way of convertibility do you expect to hear in the road map, which ends in complete and full capital account convertibility, and in which case an Indian resident — whether corporate or individual — can go out and invest whatever he can overseas?

I think that is the ultimate goal, but there is some confusion about what CAC really means. CAC means that the rupee is as good as the dollar. But we have regulatory rules and policies with regard to investment of rupees or use of rupees within India. For instance in real estate, agriculture or the banking sector. Even in the largest economy like the US, there are concerns about ports being sold to Dubai or some concerns regarding their companies being sold to the Chinese. One is seeing the same thing on steel in Europe. So those concerns are always there and from a developing country's point of view, another concern is safeguards like, say, short-term debt.

CAC does not overcome the fact that one is talking about national boundaries, about markets that are different in different nations and that there are regulatory mechanisms which will stay in place whether it is for the rupee or dollar.

Are there any imminent threats of outflow of capital, like the situation in South-East Asia?

Not at all, if I imagine that we move towards that goal given our present conditions which are extremely positive in terms of growth, inflation, fiscal deficit, whatever indicator one takes. But positions can always change, so I don't see this capital outflow problem happening right now. If there are some uncertainties, then obviously there can be capital outflows. Therefore, safeguards are essential so that the economy doesn't plunge the way it happened in certain Latin American and certain Asian economies. How to do this is the matter for the panel or group to consider.

What impact could it have on the foreign exchange market and how do you see the rupee-dollar equation getting affected?

The important fact to realise is that even if one has CAC, it does not necessarily mean that the dollar-rupee or dollar-euro or euro-rupee becomes more unstable. It certainly becomes more sensitive to shocks and changes in a country's situation, which is unexpected or which undermines the basic philosophy or the basic thinking of an investor when he buys stocks. For instance, suppose there is a large amount of stocks of dollars being held in our banks. Now stocks can be built over 2-3 years, but the outflow can happen overnight or within 2- 3 days. So one cannot stay away from volatility, in cases where there are shocks or unanticipated developments or crisis.

The convertibility per se does not mean that one is looking for more unstable exchange or more volatile exchange rate, but volatility in response to shocks or unexpected development is likely to be higher.