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India Not Considering Tobin Tax on Capital Flows, Subbarao Says

India has no plans to impose the so-called Tobin tax on foreign capital inflows, Reserve Bank of India Governor Duvvuri Subbarao said, adding the position may be reviewed in future.

“As regards a Tobin type tax, we have not so far imposed nor are we contemplating one,” Subbarao said in a speech in Zurich yesterday, a copy of which is posted on the central bank’s website. “However, it needs reiterating that no policy instrument is clearly off the table and our choice of instruments will be determined by the context.”

The concept of a transactions tax is often called a Tobin Tax, though current proposals go beyond the levy on currency transactions that the late Nobel laureate James Tobin proposed in the 1970s. Emerging markets in Asia are grappling with a surge in foreign investments in stocks as their economies expand and outpace the rest of the world.

Subbarao said large capital movements to and from a country can “jeopardize financial stability” and that India has experienced such floods and sudden stops. Net flows dropped to $7 billion in the year ended March 31, 2009, from $107 billion in the previous financial year, he said.

India’s rupee strengthened in the first four months of 2010, the longest winning streak in three years, as overseas investors bought 276.7 billion rupees ($6.1 billion) of stocks, according to Bloomberg data.

‘Liberal’ Policy

“Our policy on equity flows has been quite liberal, and in sharp contrast to other emerging market economies which liberalized and then reversed the liberalization when flows became volatile,” Subbarao said. “Our policy has been quite stable.”

India permits the rupee to be freely convertible on the trade and current account and places curbs on the capital account. An advisory panel formed by the central bank in 2006 suggested the rupee be made fully convertible in five years.

India also caps the amount of funds local companies can raise from overseas and places a ceiling on foreign investments in debt instruments. The limit on foreign investment in government debt is $5 billion and on corporate debt is $10 billion.

“India has followed a consistent policy on allowing capital inflows in general and on capital account management in particular,” Subbarao said. “Our position is that capital account convertibility is not a standalone objective but a means for higher and stable growth.”

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