The Reserve Bank of India (RBI) has made a strong case for internationalization of the rupee and sought to differentiate it from capital account convertibility. According to the central bank countries that can borrow in their own currency are less susceptible to international crisis.
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Describing as `heartening' the success of the International Finance Corporation in raising rupee-denominated debt globally for investment in India, RBI executive director G Padmanabhan, said "In economics, the term 'original sin' has been used to describe the inability of countries to borrow abroad in their own currency which lies at the heart of currency crisis and financial fragility." He added that no one has ever been able to explain how a Greek-style crisis could take place in a country like United States, Britain or Japan that borrow in their own currency.
According to the central bank ED, internationalization of the currency refers to a state where exporters from other countries agree to take payment in rupees and where the currency risks in international borrowings are borne by lenders rather than borrowers in India.
Padmanabhan's remarks come at a time when the government is encouraging corporates to issue rupee-denominated debt to reduce foreign currency risks. According to investment bankers several top-rated corporates are looking at this option. He was speaking at MSNM Besant Institute of PG Management Studies, Mangalore ?on Saturday.?
He pointed out that capital account convertibility would bring with it both long-term investment in projects as well as short-term hot money that sought to take advantage of market volatility. "When the Asian crisis broke out, some economists advocated imposition of temporary capital controls as a policy tool to steer the affected economies out of the crisis. In fact Malaysia did precisely this to check deepening of the crisis with success. However at that time it was considered an unorthodox and anti-market policy prescription," he said. Since then capital controls have gained in acceptance and in 2008 capital controls were a key component for Iceland's revival package.
While there was no compelling case for capital account convertibility, Padmanabhan said that India needs to prepare for it as it is inevitable with globalisation. "Sooner than later, it (Indian economy) will need to get closely integrated with the rest of the world. While there are risks associated with full capital account convertibility, resisting liberalisation over an extended period may prove futile and counterproductive.Transfer pricing is one of the methods which corporates may employ to get around capital account restrictions. In any case, keeping any restriction for too long is self defeating as people end up finding new methods of bypassing that restriction," he said.
Source - Times Of India
www.sevagiri.com
Describing as `heartening' the success of the International Finance Corporation in raising rupee-denominated debt globally for investment in India, RBI executive director G Padmanabhan, said "In economics, the term 'original sin' has been used to describe the inability of countries to borrow abroad in their own currency which lies at the heart of currency crisis and financial fragility." He added that no one has ever been able to explain how a Greek-style crisis could take place in a country like United States, Britain or Japan that borrow in their own currency.
According to the central bank ED, internationalization of the currency refers to a state where exporters from other countries agree to take payment in rupees and where the currency risks in international borrowings are borne by lenders rather than borrowers in India.
Padmanabhan's remarks come at a time when the government is encouraging corporates to issue rupee-denominated debt to reduce foreign currency risks. According to investment bankers several top-rated corporates are looking at this option. He was speaking at MSNM Besant Institute of PG Management Studies, Mangalore ?on Saturday.?
He pointed out that capital account convertibility would bring with it both long-term investment in projects as well as short-term hot money that sought to take advantage of market volatility. "When the Asian crisis broke out, some economists advocated imposition of temporary capital controls as a policy tool to steer the affected economies out of the crisis. In fact Malaysia did precisely this to check deepening of the crisis with success. However at that time it was considered an unorthodox and anti-market policy prescription," he said. Since then capital controls have gained in acceptance and in 2008 capital controls were a key component for Iceland's revival package.
While there was no compelling case for capital account convertibility, Padmanabhan said that India needs to prepare for it as it is inevitable with globalisation. "Sooner than later, it (Indian economy) will need to get closely integrated with the rest of the world. While there are risks associated with full capital account convertibility, resisting liberalisation over an extended period may prove futile and counterproductive.Transfer pricing is one of the methods which corporates may employ to get around capital account restrictions. In any case, keeping any restriction for too long is self defeating as people end up finding new methods of bypassing that restriction," he said.
Source - Times Of India
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