Reserve Bank of India (RBI) Governor Raghuram Rajan on Friday said the rupee might become fully convertible in the next few years. “My hope is we will get to full capital account convertibility in a short number of years,” he said, addressing the convocation at the Gokhale Institute of Politics and Economics here.
Full capital convertibility means a foreign investor can repatriate his money into his local currency at will; this isn’t allowed in India.
Rajan said RBI was fairly open to the inflow of foreign funds into the country but there were a few areas such as debt (short-term flows) in which the central bank preferred to keep tight control.
On Friday, Finance Minister Arun Jaitley launched India’s first international finance centre in Gujarat. Full rupee convertibility could go a long way in effective functioning of this financial services hub.
Many analysts have credited RBI for its policy of partial capital control, which helped it tide over the impact of the currency meltdown, which had hit many South Asian economies with full capital convertibility in 1997-98.
In May-August 2013, capital control helped the country withstand the effects of speculation of the US Federal Reserve tapering its monetary stimulus programme, despite India seeing as much as $ 20 billion being pulled out by foreign investors.
Following India, economy being liberalised in 1991, the government and RBI have been progressively lifting curbs on capital flows, as a result of which foreign institutional investment into domestic has risen to $ 31 billion now.
When asked whether the Federal Reserve’s plan to end the zero-interest rate regime soon would have an impact on India, Rajan said: “The global liquidity glut will eventually come to an end, when the Federal Reserve starts to increase interest rates.”
He came out strongly against international organisations that sided with industrialised countries. “In emerging markets, we have been too quiet, saying what the industrial world does is the best for global economies. Sometimes, it is but we need better discussion, better policies,” he said.
Also, there was a need to avoid spillover of the monetary policies of various countries, he said.