An adviser to Prime Minister Man Mohan Singh, India’s Central Bank Governor Duvvuri Subbarao said that the Government may need to raise interest rates as capacity constraints in power and roads and record borrowings fuel inflation. Following the financial crisis, the Reserve Bank of India is likely to come out with a third road map for bringing in capital account convertibility after the time table set in the earlier two reports were abandoned following the financial crisis and the governor also hinted that flexible exchange rates could be disadvantageous for India if trading partners or competitors (read China) adopted a fixed rate. A decade ago, SS Tarapore had headed a committee to chalk out the road map for achieving capital account convertibility in 1997.
Says Rahul Bajoria, an economist at Bradclay’s Capital in Singapore 2008 said “Subbarao has raised interest rates by 50 basis points so far this year, and may increase them by another 100 basis points to 6.25 percent by the year-end, Despite the tightening, the government expects the economy to expand close to 9 percent in the financial year ending March 2010”. RBI governor D Subbarao in his address at a high level conference on “The International Monetary System, Jointly organized by the Swiss National Bank and IMF in Zurich on Tuesday. The road map for capital account convertibility will be reworked, reflecting the lessons drawn from the global financial crisis, according to the RBI governor. the central bank feels that the economy should traverse towards capital convertibility along a gradual path – recalibrated on a dynamic basis in response to domestic and global developments”.
Many feel it hurts the exporters’ interest, for Subbarao’s comments assume significance when the country faces a deluge of dollars on account of which it has to grapple with a strong rupee.