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Time to Let Loose NRIs

There comes a stage in everyone’s life when one must choose between the safety of home and excitement of the world outside. This is true for economies also. In the formative years of self-discovery, nations benefit from the safety and security afforded by a walled-in monetary system, protected from vagaries of the external world.

But there comes a point when the walls start stifling aspirations, instead of nurturing them. One can decide to stay put at that point, or walk the path less travelled with measured steps. From Prime Minister Narendra Modi’s recent speech at an RBI function, one gets the sense that this coming-of-age moment is around the corner for the rupee. Such a step will be a watershed moment for India.

India took the first baby step towards prepping the rupee for its eventual transition to full adulthood when we accepted Article 8 of the IMF charter in 1994. The regulatory changes emanating from it made the Indian currency freely convertible for most current account transactions, ushering in the era of current account convertibility.

In 1997, RBI set up a committee under S S Tarapore to chalk out a road map for graduating to capital account convertibility. This was followed by a second committee in 2006 headed by Tarapore.

However, the 2008 financial crisis, and the asset quality crisis that hit the Indian banking system around the same time, ensured that recommendations of the committees mainly remained on the back burner, but for incremental changes resulting in the gradual easing of restrictions on capital account transactions.


However, plans for the next big leap — introducing the rupee as a free-floating currency globally — have again started gaining momentum. RBI’s ‘Report on Currency and Finance 2020-21’ set the ball rolling by postulating the emergence of the rupee as an international currency. Following this, an interdepartmental committee was set up within RBI to frame a road map for the internationalisation of the rupee. The committee’s report was made public by RBI a few months back. Modi’s speech is, perhaps, the final green signal for implementing the ambitious plan.

The timing of the move looks quite apt from a macroeconomic perspective. The Tarapore committees put stringent conditions on fiscal responsibility and financial sector reforms as preconditions for moving towards capital account convertibility. Today, our forex reserves are at a comfortable level and steadily growing. The banking sector is well-capitalised and in good health, with arguably the lowest NPA levels ever.


Though fiscal deficit and inflation are on the higher side, they are projected to come down by 2025 and fall further in later years. Trade deficit has also started coming down, and if the trend holds, we may even record a trade surplus by 2028. In short, the ground situation looks conducive and favourable for the proposed transition, more than ever before. The newly launched digital rupee can also provide the much-needed technological edge for spreading currency globally.


But there are a few lingering concerns. Dwindling global banks Depleting presence of international banks in the Indian market is a worry. These banks have a big role to play in taking the rupee global, but their network and market share have been shrinking. There is no denying that some regulatory prescriptions and governmental policies have accentuated this trend. It will be of mutual benefit if this trend can be reversed, since these banks can create a global market for the Indian currency by providing distribution networks, clearing and settlement services, liquidity and leverage.

Tax hurdle India is starting to be known for its stern and uncompromising stand in taxation matters. While we are well within our rights to do so, an open and less combative disposition in framing and enforcing tax policies can create a more ambient investment climate.

Easy resolution Restoring our litigation system’s efficiency, speed and respectability is essential if the rupee has to take centre stage in the global arena. Cases like Future-Amazon and SpiceJet are worrisome trends for global investors.

Clear these hurdles, and we certainly have a case of taking the rupee on a world tour and letting loose the non-resident rupee.

By Prakash Balakrishnan

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