Capital convertibility: thanks, but no thanks

INDIA’S move towards capital account convertibility (CAC) has been slow and steady and the general expectation among bankers is that it may be a while before the rupee is made fully convertible.
No one’s willing to guess just how soon the rupee is going to be fully convertible, but no one’s complaining either. And that’s only because the Reserve Bank of India (RBI) has been doing an extremely good job of managing exchange controls.
Today, short of owning property overseas, there’s almost nothing that resident Indians cannot do. The RBI has, over the last two years, been progressively relaxing exchange control norms, making foreign currency transactions for Indian corporates and individuals a lot easier. The recent Pravasi Bharatiya Divas in Delhi, where the government did its best to appease the non-resident community, may result in the finance minister making further relaxations on foreign exchange controls for them in the Union Budget for ’03-04, but beyond that, bankers expect the process to be gradual.
“There’s no need to do anything dramatic in a hurry. At present, neither is it desirable to make the rupee fully convertible, nor is it demanded,� says MA Ravi Kumar, regional head (global markets), Standard Chartered Bank.
While almost all criterias for the Indian rupee to be made fully convertible have been met, the country’s high level of non-performing loans in the banking system and the fiscal deficit may mean that we have still some way to go to full convertibility.
The Tarapore Committee, in its report on capital account convertibility, had laid down a number of preconditions that would have to be met before the rupee became fully convertible on the capital account.
Among them, a reduction in the country’s fiscal deficit to 3.5% of GDP by ’99-00, an average inflation rate of 3-5% for the period ’97-00, complete deregulation of all interest rates in ’97-98, a reduction in the cash reserve ratio to 3%, reduction in the level of banks’ non-performing assets (NPAs) to 5% in ’99-00 and the adoption of a transparent exchange rate policy by ’00.
While the resident individual has nothing to complain about today, a lot still needs to be done in terms of allowing the free entry and exit of foreign capital into the country.
For instance, despite the RBI having improved foreign portfolio investor sentiment by allowing them to entirely hedge their investments in the country against currency fluctuations, they still cannot pull out of the country overnight.
The procedures involved in even pulling out of India are just too many, the whole process normally taking 8 to 9 months.
“I think we need to understand that capital account convertibility is not just about the RBI allowing the freeflow of capital in and out of the country. Rigid labour laws, land ownership laws and red tapism need to first be addressed if the country must really benefit,� says the treasury head of a foreign bank.