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RBI's intervention in forex market not political but precautionary, says Jalan

The Reserve Bank of India's intervention in foreign exchange market is not being governed by a pre-determined target or band around the exchange rate, according to its governor, Dr Bimal Jalan.

The exchange rate policy was guided by the need to reduce excess volatility, prevent the emergence of destabilising speculative activities, help maintain adequate level of reserves and develop an orderly foreign exchange market.

'India's crawl towards capital account convertibility valid'

India will adopt a cautious policy while moving towards capital account liberalisation of the rupee.

According to Jalan, India has cautiously but systematically moved, over a period of time, from a comprehensive control regime to current account convertibility and market-determined exchange rate.

The capital account had been so managed as to ensure growth with stability while consistently adding to India's foreign currency reserves.

In this context, India's central bank governor felt that the policy of cautious movement towards capital account liberalisation that had been adopted by India continued to be valid.

Jalan also pointed out that India's policy on keeping external borrowings, particularly short term borrowings under limits, had been vindicated by the current international consensus on the need for controlling short term debt.

Jalan made these observations in a lecture entitled International Financial Architecture -- Developing Countries' Perspective delivered at the 49th anniversary of the Central Bank of Sri Lanka in Colombo today.

While each country must decide on its own the path of currency convertibility, Jalan said that the timing and sequencing of such liberalisaion would largely depend on the extent of stability and institutional structure of the domestic financial sector.

It did not seem necessary for the IMF to embark on a time-consuming procedure for amendment of its articles to promote capital account liberalisation.

The East-Asian crisis has demonstrated the vital importance of financial institutions in sustaining the growth momentum and development, he said. It was no longer possible for developing countries to delay the introduction of strong prudential and supervisory norms, and introduce structural reforms to make the financial system more competitive, transparent and accountable.

He was also categorical that there was a lot more work that needed to be done to make India's financial system deeper and more vibrant.

Jalan calls for review of voting system of IMF, WB

Jalan also called for a review of the voting structure of the International Monetary Fund and World Bank.

He said that it was one of the ironies of the last 40 years that although developing countries as a group, had grown much faster than the developed countries and their relative economic strength in terms of output and trade increased substantially, their actual voting power in the Bretton Woods institutions had tended to decline.

This needs to be corrected in the next round of quota exercises in the IMF and capital increase in the World Bank, Jalan said.

Deliberating on the over-arching issues that needed to be kept in view in the arrangements for financial cooperation in the new millennium, the RBI governor said that some general agreement on the principles that should guide efforts to enhance the effectiveness of the international financial institutions had already been reached.

These included arrangements to enhance accountability, an inclusive process that facilitates a broad range of countries and other institutions and a more participative and open decision making process.

Jalan stressed that an important consideration that the international community must pay attention was the hard reality that these new arrangements could not operate successfully without equal partnership between developed and developing nations.

India has been involved in almost all discussions where developing countries have been represented, including G-22 sponsored by the USA and G-33 sponsored by G-7, and an effort has been made by India's representatives to present the country's and developing nations' perspective on various issues, he added.

On the role of the official sector in forestalling a debt crisis, Jalan remarked that the evolution of the contingent credit line would depend on how flexibly the eligibility criteria in the new IMF facility was operated in practice.

He felt that for the success of the scheme, it seems necessary to ensure that performance criteria are in fact appropriate and objective so that there is no room for subjectivity or introduction of political and other non-economic considerations.

The scheme is likely to succeed in avoiding potential problems only if it is operated in a more or less automatic way subject to certain pre-determined quantitative and objective criteria being satisfied by the country.

On the IMF's role in capital account liberalisation, Jalan said that each country would need to decide on its own path of such liberalisation with regard to the timing and sequencing. This in turn was likely to depend to a large extent on the stability and institutional structure of the domestic financial sector.

A constructive consultative process between the IMF and member countries on these issues should be adequate to achieve the objectives of capital account convertibility, he added.

UNI

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