The Rupee unleashed

As promised, this article is going to focus on the proposed full convertibility of the Indian currency(Rupee).

True to form, I'll start with a couple definitions:

Current Account: Arithmetic difference between the money spent on imports and that gained from exports.

Capital Account: Arithmetic difference between investments flowing into and out of a country.

These two accounts balance each other: A capital account surplus equals a current account deficit. Thus the U.S, imports most of it's stuff from abroad(current account deficit), and can do this because foreigners invest a lot in dollar-denominated stocks and bonds(capital account surplus).

The Indian Rupee is a 'hybrid' or managed floating' currency in that it is tradeable with other currencies. However, the Reserve Bank of India(RBI) - the Indian equivalent of the Federal Reserve can step in to stabilize the currency.

The Indian currency is full-floating on the current account - thus one can use Indian Rupees to buy foreign goods, for educational expenses, etc. One can use a credit card in the USA and pay off the balance with Indian Rupees in India! (C'mon , how many of you knew that?)

However, the Rupee is not fully convertible on the capital account. There are restrictions, for example, on how much money Indian companies can raise through bonds from foreign investors. But once the Rupee floats freely, all these restrictions will vanish. NRI's will be be able to invest unlimited money in Indian assets, and Indian corporations will be able to buy companies based outside of India.

I think a move towards full convertibility will greatly benefit India due to the tremendous confidence it will instill in investors worldwide. It will provide one great way to leverage large reserves of foreign exchange (an estimated $150 BILLION by end-2006) that India boasts of.

If all this piques your interest, read this article in the Economic Times

Namaste