RBI for gradual capital account opening - Subba Rao

"Our position is that capital account convertibility is not a stand alone objective but a means for higher and stable growth," Reserve Bank of India (RBI) Governor Duvvuri Subbarao said in a speech, delivered at a conference hosted by the Swiss National Bank and the IMF in Zurich on Tuesday.

"As regards a Tobin type tax, we have not so far imposed nor are we contemplating one. However, it needs reiterating that no policy instrument is clearly off the table and our choice of instruments will be determined by the context," he said. The speech was posted by the RBI on its website www.rbi.org.in on Wednesday. Tobin tax is a transaction tax on currency conversions intended to curb volatility and speculation.

"We believe our economy should traverse towards capital convertibility along a gradual path -- the path itself being recalibrated on a dynamic basis in response to domestic and global developments," Subbarao said.

Foreigners have invested a net $6 billion in Indian stock markets so far in 2010, adding to record capital inflows of $17.5 billion in 2009. The inflow has helped the rupee gain about 2.7 percent this year, after rising 4.7 percent last year. Subbarao said the central bank's preference was for long-term equity inflows, rather than short-term debt flows.

"Our policy has been quite stable," he said, referring to emerging economies that had opened up and then tightened rules when flows became volatile. "Our policy on equity flows has been quite liberal." Subbarao reiterated the exchange rate is not guided by a fixed or pre-announced target or band.

"Our policy has been to intervene in the market to manage excessive volatility and disruptions to the macroeconomic situation. This volatility centric approach to exchange rate also stems from the source of volatility which is capital flows," he said.