News: Soros warns against full rupee float

(DNA 19/12/2006) New Delhi - Billionaire investor George Soros has expressed confidence in the Indian financial markets but warned against making the rupee fully convertible.

Soros was speaking at an event organised to launch his book, The Age of Fallibility: Consequence of the War on Terror. He said it was the government’s role to prevent the economy from getting overheated.

Soros said overseas interest in India was growing but did not say whether he would invest in the country.

At present, India allows its currency to be convertible only on the trade or current account. This allows companies and individuals to freely convert rupees into foreign currencies for trade in goods and services.

On September 1, a panel formed by the Reserve Bank of India suggested a three-phase, five-year roadmap to create a freely traded Indian rupee. The RBI is looking at suggestions to further ease rules that cap overseas fund investments in local bonds.

Soros argued that capital controls are effective only in times of crisis and cannot be a general. Dwelling on his “theory of reflexivity”, Soros said the generally accepted notion is that financial markets tend towards equilibrium, and on the whole, discount the future correctly.

“I operate using a different theory, according to which financial markets cannot possibly discount the future correctly because they do not merely discount the future, they help to shape it,” Soros said. “In certain circumstances, financial markets can affect the so-called fundamentals, which they are supposed to reflect.”

When that happens, he said, markets enter into a state of dynamic disequilibrium and behave quite differently from what would be considered normal by the theory of efficient markets. He said such boom-and-bust sequences do not arise very often. “But when they do, they can be very disruptive, exactly because they affect the fundamentals of the economy.”