The Telegraph
Since 1st March, 1999
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Govt clips convertibility scope

New Delhi, Nov 12: Within weeks of the P-notes crisis, the Congress- led government said its goal was no longer full convertibility of the rupee, but fuller convertibility, with some restrictions on capital flows.

“There will never quite be full convertibility of the rupee, only ‘fuller’ convertibility,” finance minister P. Chidambaram said at the Economic Editors’ conference here today. “We will continue to liberalise the capital account. But we will always have some restrictions on capital flows.”

Full convertibility allows Indians and foreigners to convert the rupee into any other currency at will and take out or bring in sums of money with few or no restrictions.

India recently announced curbs on foreign exchange inflows being brought into its bourses by anonymous investors who used participatory notes or P-notes.

Chidambaram indicated the government would continue watching the rupee market and capital flows situation. “Sebi has taken some steps to moderate inflows ... we are watching the situation.”

The curbs on P-notes elicited sharp reactions from US treasury secretary Henry Paulson who advised India not to impose any restrictions on forex flows. India has, however, contended that a sudden gush of dollars from the US where interest rates have fallen is appreciating its currency too fast, making its exports uncompetitive.

The country has over the years been subjected to advice from trade partners, such as the US and the EU, and global monetary authorities such as the World Bank, on moving towards full convertibility.

It has always resisted hastening the pace of its currency reforms, while promising to eventually do so over a period of time. Chidambaram said the problem with the huge rush of foreign exchange into India’s bourses was that “the reserves have risen rapidly even as the current account deficit (the gap between export income and expenses on imports) was low”.

This, he explained, meant the domestic economy did not have the ability to absorb these huge capital inflows in such a short period of time, leading to huge appreciation of the Indian currency. The rupee has risen by 12.5 per cent in a year and is trading at around Rs 39.37 to the dollar.

The gain in the rupee has hurt merchandise exports, which make up half of India’s manufacturing. Exports in the six months ended September 30 increased 18.5 per cent, almost half the pace in the same period a year earlier.

As part of its efforts to curb the appreciation of the rupee, the government will soon set up a $5-billion fund out of its foreign exchange reserves of $266.5 billion.

“Some glitches still stand in the way but we are committed to resolve them,” Chidambaram said.

The RBI board has given its in-principle approval in respect of the special purpose vehicle (SPV) to be established to borrow funds from the apex bank and lend to Indian companies implementing infrastructure projects in India or to co-finance their external commercial borrowings for such projects solely for expenditure outside India.

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