AGRA (India), Feb 24: India should not allow its rupee currency to float freely and must retain some controls to avert any major crisis due to capital flight, a member of the panel on currency reform appointed by the central bank said on Saturday.

The panel, which submitted its report in September, has ecommended a three-phase, five-year plan to allow fuller rupee convertibility and greater movement of capital in and out of the local currency by the end of the 2010/11 fiscal year.

Subsequently, the central bank allowed resident Indians to remit up to $50,000 in a single financial year, double the earlier limit, and permitted foreign exchange earners to retain 100 per cent of their earnings in foreign exchange accounts on the panel's recommendation.

Both these measures were opposed by A.V. Rajwade, who says such steps will be detrimental and favours a more gradual reform process.

I don't see any great merit in a freely floating currency for an economy like India...We are a capital hungry economy, he told Reuters in an interview on the sidelines of a fixed income conference in the northern Indian city.

Right now, no money is going out because returns in India are very high, but when the situation changes, that is when capital flight will take place. That is when it is going to be most dangerous The rupee has been convertible on the current account since 1994, meaning it can be changed freely into foreign currency for specific purposes like trade-related expenses.But it cannot be converted freely for activities such as acquiring overseas assets.

Rajwade said India was not ready for a full float as the majority of its exports were commodities which are sensitive to prices making exchange rate competitiveness key to growth.

Also, export units were not equipped to manage losses in case of massive swings in exchange rate.

With the Indian economy growing at an average of over 8 per cent a year in the past three years and becoming increasingly integrated with the global economy, policymakers and analysts have been clamouring for a freer float.

But high growth has resulted in a spurt in domestic inflation. Wholesale price inflation rate for the 12 months to Feb. 10 was 6.63 per cent, lower than the previous week's 6.73 per cent, the highest in more than two years.

Rajwade cautioned the government and the central bank against using the rupee to control inflation.

Some analysts have said the government and central bank could allow the rupee to appreciate to make imports cheaper and calm inflation.

The Indian rupee has risen more than 6 per cent against the US dollar since hitting a three-year low of 47.04 in July. A six-currency JP Morgan index shows that the currency is overvalued by 9 per cent.

They have been keeping rupee plus minus 5 percent of the neutral level in inflation adjusted terms. Lately, it had gone to almost 10 percent. I think that was also a step probably taken to curb inflation, said Rajwade.

But I think that has dangerous implications. As it is our current account deficit would be about $16 billion plus this year.— Reuters