Indian rupee convertibility

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Officially, it is claimed that the Indian rupee has a 'market determined exchange rate'. But de facto, the RBI trades extensively to manipulate this market. So the currency regime in place for the Indian rupee is a 'de facto pegged exchange rate' (see Patnaik, 2003). This is sometimes called a 'dirty float' or a 'managed float'. The RBI trades actively on the INR/USD market to deliver a very low volatility of the INR/USD exchange rate. Other rates - like the INR/EUR or the INR/JPY - have volatilities which are typical of floating exchange rates.

The pegged exchange rate is accompanied by an elaborate system of capital controls. On the current account, there are no currency conversion restrictions hindering buying or selling foreign exchange (though trade barriers do exist). On the capital account, "foreign institutional investors" have convertibility to bring money in and out of the country and buy securities (subject to an elaborate maze of quantitative restrictions). Local firms are able to take capital out of the country in order to expand globally. Local households are highly restricted in their ability to do global diversification. Owing to an enormous expansion of the current account and the capital account, India is increasingly moving into de facto convertibility.

[edit] Chronology

1991 - India began to lift restrictions on its currency. A series of reforms remove restrictions on current account transactions including trade, interest payments & remittances and on some capital assets-based transactions.

1997 - A panel set up to explore capital account convertibility recommended India move towards full convertibility by 2000, but timetable abandoned in the wake of the 1997-98 East Asian financial crisis.

2006 - The Prime Minister, Dr Manmohan Singh, asks the Finance Minister and the Reserve Bank of India to prepare a road map for moving towards capital account convertibility. The report which came about has been sharply criticised by experts.

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