C stands for convertibility

Prime Minister Manmohan Singh has kickstarted the process of moving towards full convertibility of the rupee on the capital account.

Prime Minister Manmohan Singh has kickstarted the process of moving towards full convertibility of the rupee on the capital account. It means removal of all controls on the rupee and making it freely convertible to other currencies and vice versa. As of now, the rupee is convertible only on the current account for trade

WHAT 038; WHY

If the rupee is made fully convertible, anybody can convert or take out any amount of the rupee to anywhere. Full convertibility would boost foreign investment in India. It would give companies more access to foreign debt markets and cut delays in foreign exchange transactions, helping travellers and businesspersons. Investors and companies can save money and time in a full float regime.

WHEN

The Reserve Bank of India and the Finance Ministry have been told to prepare the roadmap for the free float of the rupee. If all goes according to plan, this is likely to happen over the next couple of years as the government will take into account various factors like deficit, forex reserves, inflation and low non-performing assets in the banking sector. The government had taken some steps towards convertibility in 1997 but the East Asian currency crisis put the issue into cold storage.

WHO

The RBI has already announced a panel headed S S Tarapore to chalk out the roadmap for convertibility. More steps will follow after the panel submits the report. The Finance Ministry will have to prepare the ground work by improving the health of its public finances and financial system for banks to absorb swings in global capital flows.

HOW

Both the RBI and the Ministry will have to ensure that inflation remains low at around 3.5 per cent and deficit at not more than 3.5 per cent of GDP. Full convertibility could come in stages. First it may be applicable in special economic zones. The government could also lift restrictions on how much individuals can take abroad, allow the rupee greater freedom of movement and enhance foreign investors8217; access to India8217;s banks and debt market.

8226; The giant step to integrate the Indian economy with the its global counterpart will face opposition, with the Left parties already voicing their disapproval.

8226; The debate will centre around the fact that, in times of crises, capital flight can take place8212;putting the economy under pressure8212;as happened in East Asia in 1997.