India to gradually move to rupee convertibility

India to gradually move to rupee convertibility

New Delhi: India will take gradual steps to full convertibility of the rupee but not in one go, finance minister Pranab Mukherjee told Parliament on Friday.

“The full convertibility of rupee is our ultimate destination and we are taking gradual steps towards this. However, it is felt that it is not time to jump to that destination at one go now," Mukherjee said in a prepared answer to Parliament.

“Considering the risks involved in opening the Indian economy fully by allowing complete convertibility of the rupee, the government and the (central bank) have adopted a calibrated approach."

Fuller convertibility is expected to facilitate rapid growth through higher investment and improve efficiency in the financial sector through greater competition.

India has drafted a plan on fuller capital account convertibility. This includes a three-phase plan extending to 2010-11 and would allow greater movement of capital in and out of the local currency, but progress has been limited so far.

Issues related to the full convertibility of the rupee was one of the roadblocks in a scuppered deal with telecom firm Bharti Airtel and South Africa’s MTN.

The rupee has been convertible on current account since 1994, meaning it can be changed freely into foreign currency for purposes like trade-related expenses. But it cannot be converted freely for activities like acquiring overseas assets.

Though India is returning to high growth, the government is grappling with a bulging fiscal deficit and inflation which rose to an annual 8.56% in January. The Reserve Bank of India (RBI) is expected to raise its key lending rate in April.

“Fiscal consolidation, lower inflation and a stronger financial system were seen as crucial signposts for India," Mukherjee said about the approach to the liberalization of India’s capital account.