Download Indian Rupee Convertibility

INDIAN RUPEE
CONVERTIBILITY
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 ISO 4217 code INR
 Official user
India
 Unofficial user(s)
Bhutan (alongside the Bhutanese
ngultrum)
Nepal (alongside the Nepalese rupee)
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 The Indian rupee (Devanagari) is the official
currency of the Republic of India. The
issuance of the currency is controlled by the
Reserve Bank of India
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 The modern rupee is subdivided into
100 paise (singular paisa) though this
division is now theoretical; as of 30
June 2011, coin denominations of less
than 50 paise ceased to be legal tender.
Paise coins of the rupee have nominal
values of 50, and lower denominations
have been officially withdrawn.
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 The Indian rupee symbol (officially adopted
2010) is derived from the Devanagari
consonant "र" (Ra) with an added horizontal
bar.
 The first series of coins with the rupee symbol
was launched on 8 July 2011.
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Mahatma Gandhi Series
(banknotes)
The Reserve Bank of India (RBI)
introduced the series in 1996 with
the 10 and 500 banknotes. At
present, the RBI issues banknotes
denominations from 5 to 1000.
Printing of 5 notes which had
stopped earlier restarted in 2009.
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 As of January 2012, the new Indian rupee
sign has been incorporated in the currency
notes in the denomination of 10, 100, 500
and 1000.
 Each banknote has its amount written in
15 languages. On the obverse side, the
denomination is written in English and
Hindi. On the reverse of each note is a
language panel that displays the
denomination of the note in 15 of the 22
official languages of India.
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WHAT IS RUPEE CONVERTIBILITY?
 Convertible currencies are defined as
currencies that are readily bought,
sold, and converted without the need
for permission from a central bank or
government entity. Most major
currencies are fully convertible; that
is, they can be traded freely without
restriction and with no permission
required.
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 After liberalization began in 1991, the
government eased the movement of
foreign currency on trade account.
This was the first concrete step the
economy took towards making our
currency convertible on trade
account.
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 In the next two to three years,
government liberalized the flow of
foreign exchange to include items like
amount of foreign currency that can be
procured for purposes like travel abroad,
studying abroad, engaging the services
of foreign consultants etc. This set the
first step towards getting our currency
convertible on the current account.
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 The rupee has been convertible on
current account since 1994, i.e, it can
be changed freely into foreign
currency for purposes like traderelated expenses. But it cannot be
converted freely for activities like
acquiring overseas assets.
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 There was also simultaneous
relaxation on the restriction on the
funds that foreign investors can
bring into India to invest in
companies and the stock market in
the country. This step led to partial
convertibility on the Capital
Account.
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 "Capital Account convertibility in its
entirety would mean that any
individual, be it Indian or foreigner
will be allowed to bring in any amount
of foreign currency into the country
and take any amount of foreign
currency out of the country without
any restriction."
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 India has drafted a plan on fuller
capital account convertibility. This
includes a three-phase plan and
would allow greater movement of
capital in and out of the local
currency, but progress has been
limited so far.
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 India will take gradual steps to
full convertibility of the rupee
but not in one go-Pranab Mukerjee
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 RBI intervention in currency markets
to deliver low volatility in the
exchange rates, and not to take a view
on the rate or direction of the Indian
rupee in relation to other currencies.
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 Also affecting convertibility is a series
of customs regulations restricting the
import and export of rupees. Legally,
foreign nationals are forbidden from
importing or exporting rupees, Indian
nationals can import and export only
up to 7500 rupees at a time.
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The possession of 500 and 1000
rupee notes in Nepal is
prohibited from June 2000 as
per India’s request to curb
unothorised trade between the
two neighbors.
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 On the current account, there are no
currency conversion restrictions
hindering buying or selling foreign
exchange).
 On the capital account, foreign
institutional investors have
convertibility to bring money in and out
of the country and buy securities.
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 Local firms are able to take capital out
of the country in order to expand
globally. But local households are
restricted in their ability to do global
diversification. However, owing to an
enormous expansion of the current
account and the capital account, India
is increasingly moving towards de
facto full convertibility.
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RUPEE AS A CONVERTIBLE CURRENCY
AND ITS IMPLICATIONS
 The recent decision of the government to
have full convertibility of the Indian Rupee
which will affect everyone in the country
but is remotely understandable by a few, is
one such important decision, which is
designed to please the international
financial institutions and the 10 percent of
the population of India who are either rich
or of upper middle class.
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Advantages
 The benefits of free flows of money in a
fully convertible regime means foreigners
would be able to invest in the Indian stock
markets, buy up companies and property
including land (unless there are
restrictions). Indian people and companies
can import anything they would like, buy
shares of foreign companies and property
in foreign lands and can transfer money as
they please.
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 The expected benefits for India would
depend on the attractiveness of the country
as a safe destination for short-term
investments. Long-term investments do not
depend on convertibility. China has no
convertibility, instead they have a fixed
exchange rate for the last 12 years. Yet, China
is the most important destination for longterm foreign investments. Thus, discussions
about the full convertibility should be about
the desirability of short-term investments
and their implications.
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 Another advantage of full
convertibility of Rupee for the Indian
rich is that they can import as they
like and buy properties abroad as they
were allowed to do so during the days
of the British.
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Disadvantages
 India’s domestic producers have to
compete against foreign suppliers like
Chinese who may have deliberate low
rate of exchange for their currencies
thus making their goods low in price.
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 There are many historical examples in
India. Within 20 years between 1860 and
1880, India’s domestic manufacturing
industries were wiped out by free trade
and convertible Rupee during the days
of British Raj. Indian farmers during
those days could not cultivate their
lands, as the imported food products
were cheaper than whatever they could
produce.
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 The freedom for India’s rich to buy
companies and property abroad may
lead to massive diversion of funds
from investments in the home
economy of India to investments
abroad. This would amount to export
of jobs to foreign countries creating
more and more unemployment at
home.
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 The most dangerous consequence of
convertibility is that Rupee will be under
the control of currency speculators. A
fully convertible regime for the Rupee
will certainly include participation of
Rupee in the international currency
market and will be the playground for
the international speculators.
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 It is very much possible for the
speculators to buy massive
amount of Rupee to drive up its
exchange rate and then they can
suddenly sell all to gain enormous
profit. That will drive down Rupee
to a very low depth suddenly.
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
If the Reserve Bank of India wants to
protect Rupee in such a situation,
within a few days India will have no
foreign exchange left in reserve and
the country will go bankrupt.
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 Convertibility of Rupee will give pleasure
to the 10 percent of Indian people who are
either rich or upper middle class, traders in
the stock market, speculators, bankers,
and accountants. The rest 90 percent of
the people will be adversely affected with
loss of employments in the manufacturing
sector and bankruptcy in the agricultural
sector and total economic uncertainly.
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 Capital account convertibility is
considered to be one of the major
features of a developed economy. It
helps attract foreign investment. It
offers foreign investors a lot of
comfort as they can re-convert local
currency into foreign currency
anytime they want to and take their
money away.
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 But many economists say that
jumping into capital account
convertibility game without
considering the downside of the step
could harm the economy. The East
Asian economic crisis is cited as an
example by those opposed to capital
account convertibility.
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 Embracing capital account
convertibility without adequate
preparation could be catastrophic.
But India is now on firm ground given
its strong financial sector reform and
fiscal consolidation, and can now
slowly but steadily move towards
fuller capital account convertibility.
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