This could be the year of the rupee

Written by Surabhi Rastogi | Surabhi | Sunny Verma | Updated: Dec 31 2007, 04:45am hrs
The stage seems set and the cast ready, but the script is a tad loose. The issue of full capital account convertibility of the rupee continues to come up every now and then, with no final answers. This despite some pundits saying that the foundations of the economy were made quite strong in 2007 for a move towards full convertibility.

The indications are positive. Growth is expected to be at close to 9%, and inflation is low although a rise in the prices of fuels is on the cards. Tax revenue is pouring in. India Inc is shopping like never before with a huge number of M&As happening, especially overseas.

Another defining element of the economy in 2007 was the phenomenon of The rupee appreciation buoyed by unprecedented capital inflows into the country. The rupee has risen by about 12% vis--vis the US dollar and is expected to be stronger in 2008.

Overall, the economic dynamics in 2007 created the right scenario for taking a firm step towards full capital account convertibility. Experts also feel the time is just right to make a move in this direction

Subir Gokarn, chief economist, Standard and Poors Asia Pacific, says, The recent changes in convertibility have made the rupee almost fully convertible but for a few technical details. The present economic conditions rupee appreciation, a good growth rate would make it a good time to do so as flight of capital will not really be an issue at the moment with the world keen on investing in India. Any effects of such a move will be very gradual and will not be felt immediately.

But the agenda for 2008-09 seems to have been already set by finance minister P Chidambaram as early as in November 2007, when he ruled out 100% convertibility and said, There will be fuller convertibility of rupee and not full convertibility as there will always be some amount of restrictions on foreign capital.

Government officials also echoes this sentiment, saying the issue needed to be addressed with great caution. It seems the East Asian crisis and the spectre of overheating continue to haunt North Block.

The Reserve Bank of India, too, does not seem to be in a hurry on this front. As part of its views on the Percy Mistry Committee report on making Mumbai an international financial hub, the apex bank has asked the government to go slow with plans on full capital accountconvertibility, suggesting the move be made over 5-10 years. This is in stark contrast to the Mistry Committee report, which has recommended full capital account convertibility by 2008.

A period of 5-10 years would mean that the rupee would be made fully convertible even much later than the timeframe envisaged in a roadmap prepared by the Second Tarapore Committee, which recommends full convertibility by end-2011.

Advocacy for India to tread cautiously has come from a surprising quarter. One of the worlds richest men and a financial speculator of repute, George Soros, during his recent visit to India, felt that the country should not go in for full capital account convertibility as the fundamentals of the economy needed to be made stronger. He suggested India should concentrate on managing the inflow of funds to avoid overheating of the economy.

There seems to be no clear decision or a policy on this issue. On one hand, over the past year, the government has announced measures that effectively ease restrictions for companies to invest abroad. On the other, it is facing a deluge of foreign capital, which it is trying to curb. The ban on participatory notes is one such (in)famous measure in the recent months.

Rajesh Chakrabarti, assistant professor (finance), Indian School ofBusiness, feels such measures by the government give a very confused signal. It is to be seen whether India will achieve capital account convertibility on time. Logically, there should be liberal inflows and outflows of capital but that does not seem to be happening anytime soon, Chakrabarti says.

In another paradox, the government is considering another move towards full capital account convertibility in 2008. The finance ministry and the RBI are exploring the possibility of introducing trading in rupee futures contracts on stock exchanges.

Full convertibility is likely to happen, but nobody knows when. As Omkar Goswami, chairman, CERG Advisory, puts it, The government should make the rupee fully convertible, but the question is: will it