07-27-2006, 08:59 PM
<b>ANALYSIS - RBI may keep rupee grip post</b> <!--emo&:angry:--><img src='style_emoticons/<#EMO_DIR#>/mad.gif' border='0' style='vertical-align:middle' alt='mad.gif' /><!--endemo-->
<!--QuoteBegin-->QUOTE<!--QuoteEBegin-->MUMBAI (Reuters) - The Reserve Bank of India (RBI) is unlikely to let the rupee off its leash even if the country opts for fuller capital convertibility, as a volatile currency could unsettle financial markets and dent growth.
A committee appointed by the RBI is expected to submit a roadmap early next week for a gradual move towards fuller convertibility, which, if taken up, could become India's biggest financial reform in more than a decade.
But fuller convertibility could see the central bank confront a condition known to economists as the "Impossible Trinity" where it is not possible to have free capital flows, an independent monetary policy and a managed exchange rate simultaneously.
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<b>HIGH PUBLIC DEBT A CONCERN </b>
Analysts say India must get public finances in shape if it is to survive a serious external shock after full convertibility. Rating agency Standard and Poor's projects consolidated government debt at 90 percent of gross domestic product in 2006.
Higher public debt usually crowds out private investments leading to higher interest rates and eventually to slower growth.
India has made some progress in cutting its federal fiscal deficit, <b>which fell to 4.1 percent of GDP last year from 5.9 percent in 2002/03, although when combined with states' deficits it was an estimated 7.7 percent in 05/06.</b>
Deutsche Bank said in a recent report free capital movement could exacerbate the fiscal situation - <b>rising interest rates could add to the public debt service burden and force a contraction in expenditure and growth.</b>
<b>"In turn, such dynamics can trigger vicious cycles with the slowing economy generating lesser tax revenues and adding to government funding needs that cannot be met because the banking system has been rendered illiquid by capital outflows,"</b> it said.
Analysts at JP Morgan say the committee is likely to link the road to fuller convertibility to the lowering of the deficit, which a fiscal responsibility law says must be cut to 3 percent of GDP by 2008-2009
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<!--QuoteBegin-->QUOTE<!--QuoteEBegin-->MUMBAI (Reuters) - The Reserve Bank of India (RBI) is unlikely to let the rupee off its leash even if the country opts for fuller capital convertibility, as a volatile currency could unsettle financial markets and dent growth.
A committee appointed by the RBI is expected to submit a roadmap early next week for a gradual move towards fuller convertibility, which, if taken up, could become India's biggest financial reform in more than a decade.
But fuller convertibility could see the central bank confront a condition known to economists as the "Impossible Trinity" where it is not possible to have free capital flows, an independent monetary policy and a managed exchange rate simultaneously.
...................
<b>HIGH PUBLIC DEBT A CONCERN </b>
Analysts say India must get public finances in shape if it is to survive a serious external shock after full convertibility. Rating agency Standard and Poor's projects consolidated government debt at 90 percent of gross domestic product in 2006.
Higher public debt usually crowds out private investments leading to higher interest rates and eventually to slower growth.
India has made some progress in cutting its federal fiscal deficit, <b>which fell to 4.1 percent of GDP last year from 5.9 percent in 2002/03, although when combined with states' deficits it was an estimated 7.7 percent in 05/06.</b>
Deutsche Bank said in a recent report free capital movement could exacerbate the fiscal situation - <b>rising interest rates could add to the public debt service burden and force a contraction in expenditure and growth.</b>
<b>"In turn, such dynamics can trigger vicious cycles with the slowing economy generating lesser tax revenues and adding to government funding needs that cannot be met because the banking system has been rendered illiquid by capital outflows,"</b> it said.
Analysts at JP Morgan say the committee is likely to link the road to fuller convertibility to the lowering of the deficit, which a fiscal responsibility law says must be cut to 3 percent of GDP by 2008-2009
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