Rupee to be fully convertible soon

      New Delhi: Finance Minister P Chidambaram said here on Monday that the Finance Ministry and the Reserve Bank of India (RBI) had initiated discussions on capital account convertibility of the Rupee and the steps would be announced in a few days. "Finance Ministry and RBI had discussions on capital account convertibility of the Rupee and the issue could have been part of the Budget 2006-07. But we pulled it out of the Budget as it could have overshadowed other fiscal policy announcements," Chidambaram told reporters at a function organised by the Confederation of Indian Industry (CII). He said that the Prime Minister had made a very definitive statement day before yesterday and RBI and the government would announce next steps on the issue in a few days from now. Prime Minister Manmohan Singh while releasing the third volume of the history of the RBI in Mumbai had remarked that the time was ripe for the country moving towards full capital account convertibility. Singh had asked Finance Minister Chidambaram and the Reserve Bank of India to "revisit the subject and come out with a roadmap based on current realities.''

     The issue of capital account convertibility was first considered by the Tarapore Committee in 1997. The panel had suggested that certain pre-conditions should be met to bring about capital account convertibility. These included reduction in gross fiscal deficit, mandated rate of inflation, deregulated interest rate regime and a reduction in non performing assets of banks. The Prime Minister had said that India's position, internally and externally, had become far more comfortable since then and justified the need to move towards full float convertibility. Convertibility of currency is defined as the freedom to convert one currency into other internationally accepted currencies. There are two kinds of convertibility - current account convertibility and capital account convertibility. Under current account convertibility, an individual has the freedom to buy and sell foreign exchange for international transactions that covers business travel, study and tours abroad and payments in connection with foreign trades. Capital account convertibility is the process where local financial assets can be converted into other currency-denominated assets and vice-versa at market determined rates of exchange, implying complete mobility of capital across countries. At present, the rupee is convertible on current account, basically for trade purposes. While the market takes care of most trade-related transactions, investments flowing in and out of India -- also known as capital account transactions -- are subject to restrictions and approval by the Reserve Bank. Full account convertibility of the rupee would facilitate conversion of the Indian currency into foreign currency and vice versa -- a move that would help attract greater investments.

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