apparent, and oft quoted, benefit of efficient allocation of capital per se, as the fact that, once it has been fully achieved, it does not permit, except in the very short term, “ unearned ” and “ unshared ” prosperity but delivers “ sustainable prosperity ” only if it is “ earned ” and “ shared ” prosperity! for macro economic imbalances need to be seen as sustainable, or unsustainable, with reference not only to deficits alone, but equally also, with respect to surpluses. for example, china's current account surplus is 10 % + of gdp and that of america, until recently, was 7 % of gdp. such large deficits, and surpluses, are unsustainable in the long term and capital mobility will ensure that, in due course, such imbalances are unwound by export of goods and services from the deficit reserve currency country and by import of goods and services by the surplus country. while capital account convertibility is a highly desirable policy goal, it entails a rigorous and stringent trade off in the sense that for the benefits that it brings, it also imposes a cost / price of prudent and responsible behaviour and the very highest of governance standards on all stakeholders, especially governments, central banks and financial regulators in terms of consistent and unwavering pursuit of sound and prudent fiscal and monetary policies and effective and credible regulation and supervision of the financial system. to sum up, capital account convertibility is about macro economic equilibrium, balance and harmony. in fact, the whole thing can be likened to cosmic balance / equilibrium / harmony where stars, suns, planets, all orbit within the inviolable discipline of their elliptical orbits which do not permit deviant behaviour beyond the shortest and the longest distance from the suns and stars of the orbiting planets! any deviant behaviour / conduct, inconsistent with the cosmic harmonious balance and equilibrium, will invite and inflict extremely retributive backlash ; the more severe and prolonged the disequilibrium and imbalance, the more wrenching and excruciating will be the resulting pain as is currently being experienced. but the sobering chastising that the world has experienced in the current financial crisis, should stand us in good stead going forward provided all the lessons have been unforgettably learnt, imbibed, assimilated and completely internalized! perfect replication of this cosmic harmonious balance and

v k sharma : issues in capital account convertibility and lessons from the current financial crisis inaugural address by shri v k sharma, executive director of the reserve bank of india, at the joint reserve bank of india - bank of france seminar on " issues in capital account convertibility and lessons from the current financial crisis ", held at college of agricultural banking, pune, 2 - 3 april, 2009. the views expressed are those of the author and not of the reserve bank of india. * * * mr. jean leviol, minister counsellor for economic affairs, embassy of france, new delhi, mr. gerard beduneau, director, ibfi, banque de france, mrs. isabelle vaillant, deputy director, international and economic relations, banque de france, mr. sanjaya panth, senior resident representative, imf, new delhi, mr. sandip ghose, principal, college of agricultural banking, dr. r. k. pattnaik, advisor, reserve bank of india and dear friends, i welcome you all to the rbi - bdf seminar on " issues in capital account convertibility and lessons from the current financial crisis ". i am indeed very privileged and honoured to be here in the midst of you all this morning. i am particularly very happy to note that the programme is very well conceived and structured what with all the material and relevant topics germane to the subject matter of the seminar – including, no less, the recent report of the bis cgfs working group on “ capital flows and emerging market economies ” chaired by dr. rakesh mohan, deputy governor, reserve bank of india – having been covered with the appropriate focus. the raison d ’ etre of capital account convertibility, as a highly desirable policy goal, is its promise of most efficient allocation of capital and the benefits that it, as a result, brings both to capital importing and exporting countries. the classical text book and, now fairly standard, condition precedent to full capital account convertibility is sound, robust and resilient financial system on the one hand, and the broad based convergence of a country on key macroeconomic parameters like inflation, nominal interest rates, current account deficit, gross fiscal deficit and outstanding debt as a percentage of gdp, on the other. however, significantly the recent financial crisis has thrown into sharp relief, as never before, the critical and important role of “ asset price ” inflation / asset bubbles also, as opposed to that of