Rupee convertibility is due for a crypto rethink

It’s a truth widely but rarely acknowledged that a heavy debt burden can reduce any administration’s will to quell inflation. The finance minister’s words this week of a “pointed attack” on runaway prices served to restate India’s stance on the issue. But while aid measures do grant India’s poor a safety shield, as explained, price stability has its own value too. Overall, it would help keep our economy steady on almost every front. After all, a currency must retain its real worth just to secure the validity of sums denoted in it across time. It would also set a key part of the stage for full capital convertibility, a market- oriented idea that was left to gather dust after the Asian Crisis of 1997; open economies bloated by foreign debt saw a reversal of global balances and were thrown into chaos as capital fled amid a currency crash. We have kept some clamps in place on inflows and outflows ever since, exposing only parts of India’s financial sector to external risk, equity markets far more than debt. As this calibration of globalization was also found to be a valid way out of a policy ‘trilemma’, a free-to-convert rupee simply slid off our reform agenda. But then along came crypto, offering a shadowy exit path, and our folk-level outgo clamps now look rusty.

A rupee that we can all convert freely into any other currency is not an idea we can safely adopt at the flick of a switch. Nor can its time be judged to have come until all our stability settings are favourable. These were set out back in June 1997 by the report of a panel on “capital account convertibility” headed by the late central banker S.S. Tarapore. Meant for the late 1990s, that report advocated a gradual shift enabled strictly by a fiscal deficit kept under 3.5% of gross domestic product (GDP), inflation capped at an average 3-5% by means of a central bank mandate and the bad assets of lenders—with lending rates fully freed—no higher than 5% of their total. Further easing of capital controls was to be calibrated by the rupee’s trade-weighted rate of exchange, apart from our balance of payments and adequacy of hard reserves (for which it proposed net foreign assets at 40% of currency). Among other go-ahead criteria, receipts from abroad had to stay on an uptrend, with our external debt service burden suitably low and trade gap kept consistent with these. It was a tall order all along, of course, and while we did move boldly on a few counts, we are clearly in no position to turn our rupee fully convertible.

Yet, we must work towards some of those base conditions to widen our policy options in today’s topsy-turvy times. While old-world conversion caps may apply to visible crypto trades, the technical efficacy of clamps has weakened. Sure, an e-rupee could play the heroic flank as a threat copy that satisfies some aspects of demand, but this is likely to debut as a 1:1 ‘stablecoin’, subject to the same pressures as the regular rupee. Thus, for a real dampener of capital-flight risk, we need to achieve macro stability in any case. We should reduce every incentive for money to be swiped into a digital store-of-value that’s globally accessible with such ease. It would arm the rupee to hold fort as a value retainer, both internally and overseas, even against lurchy markets. It could also ease some ‘trilemma’ constraints, thereby widening our option range to tackle exchange rate volatility. All said, even as our currency floats with buoys behind dams holding back some flows, its value can’t escape the eventual impact of basics. Like 7% retail inflation.