India lays out five-year roadmap to fuller rupee convertibility

The shift toward fuller convertibility should be staggered over three phases from 2006 to 2011, said the six-member committee set up by the Reserve Bank of India in a roadmap report released on its website Saturday.

“There is a need to break out of the control mindset,” said the committee headed by S.S. Tarapore, a former deputy governor of India’s central bank.

But it added that before moving toward greater convertibility, India needed to get its fiscal house in order and “improve regulatory and supervisory standards across the banking system.”

Economists have long argued that fuller rupee convertibility is necessary for the fast-growing Indian economy to be able to move forward at full-throttle and that its brimming foreign exchange reserves now make such a move possible.

The rupee was made partially convertible in 1994 for such purposes as foreign business trips and company interest payments on foreign loans.

But there are still curbs on converting the rupee to buy foreign assets like property, and cross-border capital movements need approval.

Capital account convertibility “should be treated only as a means to realise the potential of the economy to the maximum possible extent,” the committee said.

“Given the huge investment needs of the country and that domestic savings alone will not be adequate to meet this aim, inflows of foreign capital become imperative,” it said.

Among a slew of changes, it urged the foreign investment promotion board and Reserve Bank to liberalise regulations and procedures on foreign direct investment, in order to encourage foreign currency flows into the country.