| Finance minister Jaswant Singh (second from left) with members of the G-20 nations in New Delhi on Saturday. (AFP)
New Delhi, Nov. 23: Short-term banking capital should be avoided for investments and growth, said Bimal Jalan, governor of Reserve Bank of India, addressing finance ministers and central bank governors of the G-20 nations.
“Reversing the flow of foreign direct investment and portfolio investment involves a cost to the foreign investor. But withdrawing fixed-interest banking capital, particularly short-term, costs nothing,” Jalan said.
Jalan said foreign direct investment should be stepped up along with portfolio investment for an efficient capital account management system to be in place.
He said the pre-requisites of a sustained economy were low inflation, low current account deficit and a high growth of gross domestic product growth (GDP). “India has all the three — inflation around 3 per cent, current account deficit below 1 per cent and a GDP growth of over 5 per cent,” he added.
The RBI governor also stressed the need for a flexible exchange-rate-mechanism. “This will enable the central bank to intervene and regulate the forex market as and when necessary.”
“The policy of having higher foreign exchange reserves should take into account not only the anticipated current account deficit but also liquidity at risk arising from unanticipated capital movements,” Jalan said.
A country could avoid crisis, if it could create a stable macro-economic environment, had strong foreign exchange reserves and realistic policies to regulate capital flows, and a careful monitoring of foreign exchange markets, he added.
However, if a crisis still arose, the international community must lend a helping hand by allowing easier access to funding, he said.