Strengthen PSBs to better manage FX volatilities: Economist

Welcoming India's "prudent" and "gradual" liberalisation on the capital account front, an American economist today called for strengthening state-run banks to handle capital flow volatilities.

"It (India) needs to further strengthen its banking system so that the banks, especially public-sector banks with lower asset quality and governance issues, can cope with the volatilities," Barry Eichengreen said.

He made the remarks while delivering Exim Bank's 32nd commencement day lecture here.

Eichengreen, the George C Pardee and Helen N Pardee professor of economics and professor of political science at the University of California, Berkeley, appreciated India's work on capital account over the last 25 years.

"India has been prudent in moving gradually and incrementally when liberalising the capital account in the course of the last 25 years."

Eichengreen said India started with a policy towards FDI inflows, followed it with a programme for portfolio equity inflows and then debt inflows. It turned last towards policy outflows, gradually raising ceilings and increasing the range of transactions subject to automatic approval.

He, however, said India needs to keep an eye on outward FDI, where regulation is more permissive for corporates than individuals.

The country can also move in the direction of "price- based as opposed to quantitative restrictions" on capital account transactions, the US economist said.

"But the story, as I read it, has been broadly positive. India has a variety of other pressing challenges. But fundamental reform of its capital-account management practices, happily, is not one of them," he said.