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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 Paise coins of the rupee have nominal values of 50, and lower denominations have been officially withdrawn.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 trade-related 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 long-term 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.