The Hindu Business Line : Convertibility: Where angels fear to tread

It was the Prime Minister, Dr Manmohan Singh, who first set the ball rolling. At an RBI function, he spoke of making progress towards making the rupee convertible. The media and the `reformers' seized upon it immediately. Within days, a committee, headed by a former Deputy Governor of the RBI, was announced. The action was unprecedentedly swift - a response almost equivalent to that for a natural disaster.

Was the Prime Minister serious? Or did he say it because he had to make a speech and could think of nothing else to say? And did Mr Chidambaram pressure the RBI to immediately move forward, reacting to Dr Singh's speech? After all, central banks and central bankers are not known for hasty decision-making, especially on issues like convertibility. Dr Y.V. Reddy is the very epitome of a cautious, deliberate, conservative Governor, which is as it should be.

The pro-reform crowd was ecstatic. The Left came out with its usual anti-convertibility rhetoric. The battle lines were clearly drawn. What would the committee say? Mum has been the word after the 1997 committee's report was overtaken in double quick time by the Asian crises, although there have been significant steps towards freeing capital flows, notably overseas investment by Indian corporates, mutual funds being allowed to invest in foreign equities and liberalisation of remittances up to $25,000 per year, no questions asked.

Now Mr Chidambaram has suddenly pricked the bubble of expectations.

In an interview last week, he says convertibility is not on till at least 2009 - which means it will not happen in this Government's tenure. Our reserves, at close to $150 billion, are, no doubt, quite comfortable.

But they are miniscule compared to those of the country we are always compared with - China - whose resources top $800 billion. Maybe, hardheaded analysis of cooler and sober heads perceived the risks to be excessive, considering our rising trade deficit and the growing oil import bill.

Couple these with a possible newfound enthusiasm for foreign bank deposits and investments by resident Indians (as would be possible in a regime of full convertibility) and our hard-earned dollars could disappear in quick time. One can't rule out even the Prime Minister having had second thoughts and braking the whole idea.

Better to be safe than sorry.

More Stories on : Forex | Financial Scan

Article E-Mail :: Comment :: Syndication :: Printer Friendly Page

Stories in this Section
UFBU plans stir against outsourcing

Convertibility: Where angels fear to tread

Insurance cos bullish on unit-linked plans

UTI Bank opens branch in Singapore

IDBI doubles exposure to film financing

Andhra Bank plans voice-enabled ATMs

IOB's insurance scheme for NRIs

CVC rejects Ministry's request to review control over PSB officials