The Hindu : Business : Gradual approach to rupee convertibility: FM

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Wednesday, Aug 15, 2007
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Gradual approach to rupee convertibility: FM

Special Correspondent

For buying assets abroad, prior RBI nod is necessary

NEW DELHI: The Indian rupee, now partially convertible only on the current account, is set to move towards fuller capital account convertibility in a ‘gradual’ and ‘calibrated’ manner.

Announcing this in the Rajya Sabha on Tuesday in a written reply, Finance Minister P. Chidambaram said: “The movement toward fuller convertibility of [the] rupee will necessarily have to be gradual, sequenced and calibrated to the overall macro-economic situation and emerging needs of the economy.”

Mr. Chidambaram was replying to a question by a member on whether the government would expedite implementation of the scheme of rupee-dollar convertibility.

The Indian currency is now convertible only in specific current account transactions such as foreign exchange requirements for overseas travel or education purposes abroad. For investments overseas and acquisition of assets abroad, prior approval of the Reserve Bank of India (RBI) is necessary as such deals are classified as capital account transactions. On fuller convertibility so as to include capital account transactions, prior approval of the RBI would not be deemed as necessary.

Market intervention

Asked whether the Government and the central bank were pumping in huge amounts for the purchase of U.S. dollars merely to control the appreciation of the rupee, Mr. Chidambaram pointed out that the excess volatility in foreign exchange markets was being reined in through currency market intervention, as and when deemed necessary.

This, he said, was being followed up by liquidity sterilisation through issuance of treasury bills and dated securities under the market stabilisaton scheme (MSS).

“The RBI has been sterilising the liquidity impact of such foreign exchange purchases, placing emphasis on price stability and anchoring inflation expectations,” he said.

The Finance Minister pointed out that the overall approach to management of the country’s foreign exchange reserves took into account the change in composition of the balance of payments along with the ‘liquidity risks’ associated with different types of fund flows and other requirements.

The members were also told that the appreciation of the rupee was higher in the fiscal at 8.9 per cent in July over March.

The Indian currency has been appreciating on a monthly basis against the U.S. dollar from September 2006 onwards.

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