After Rajan, now Jayant Sinha bats for full rupee convertibility

RBI Governor Raghuram Rajan had last week said the rupee might become fully convertible in the next few years

Minister of state for finance Jayant Sinha on Wednesday batted for full capital account convertibility of the rupee.

“If India wants to be a global economy, then the capital account convertibility is needed,” he said at a conference on the National Pension System. He also noted the market feeling that it was not needed right now.

Reserve Bank governor Raghuram Rajan had last week said the rupee might become fully convertible over the next few years. India has current account convertibility, more or less, but not capital account convertibility for the rupee.

“My hope is we will get to full capital account convertibility in a short number of years,” Rajan had said.

He’d added the central bank was fairly open to the inflow of foreign funds but there were a few areas such as debt (short-term flows) in which it preferred tight control.

Many analysts have credited RBI for its policy of partial capital control, which helped it tide over the impact of the currency meltdown, which had hit many Southeast Asian economies with full capital convertibility in 1997-98.

However, unlike those countries, India did not have a higher proportion of foreign short-term debt in its loan portfolio. That crisis erupted since those countries took short-term external debt and used these for long-gestation infrastructure projects.

In fact, data issued by the finance ministry earlier this month had shown that short-term debt to the overall total fell to 18.5 per cent as on end-December 2014 against 20.5 per cent at end-March 2014. In absolute terms, short-term external debt was $85.6 billion at end-December, a fall of 6.7 per cent from the level at end-March

In May-August 2013 as well, capital control helped the country withstand the effects of speculation of the US Federal Reserve tapering its monetary stimulus programme, despite India seeing as much as $20 bn being pulled out by foreign investors.

After big-bang economic reforms in 1991, the government and RBI have been progressively lifting curbs on capital flows.