India Central Bank Downplays Odds of Early Rupee Convertibility

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An Indian central bank official downplayed the chance of early progress in making the rupee fully convertible as China seeks a bigger international role for its currency.

While there’s “no escape” from moving toward making the rupee fully tradable against other currencies, India still needs to do more to control government spending and inflation before it’s ready, according to a speech by G. Padmanabhan, a Reserve Bank of India executive director. It was posted on the central bank’s website on Monday.

“A freely convertible country must have sound, credible, and time consistent macroeconomic policy,” Padmanabhan said in an address to students at a management institute on May 16. “What does that translate to, operationally? Fiscal prudence and low inflation. Where do we stand in respect of these parameters? I wouldn’t think we are very comfortable here.”

China is pushing for the yuan to be included in the International Monetary Fund’s basket of reserve currencies. While India allows the rupee to be freely convertible on trade and current accounts, it places restrictions on the capital account, which includes portfolio investments.

The rupee, which has tumbled the most after Thailand’s baht this quarter, weakened 0.1 percent to 63.55 per dollar in Mumbai, according to data compiled by Bloomberg. The yield on the 8.4 percent bond due in April 2024 declined five basis points to 7.9 percent.

IMF Support

Nations such as Germany and France have supported China’s bid to be added, and IMF Managing Director Christine Lagarde has said the question is when, not if, the yuan qualifies. The Washington-based lender will conduct a five-yearly review of its Special Drawing Rights basket due by the end of the year.

While China has sought to cement its place in infrastructure spending by lining up support of 56 nations for a $100-billion Asian infrastructure bank, India is exploring ways to lend to its South Asian neighbors.

In his budget unveiled in February, Finance Minister Arun Jaitley said a fiscal deficit target of 3 percent will be achieved in the year to March 2018 instead of a year earlier.

The rupee was among currencies that plunged to a record when the Federal Reserve first signaled a reduction in stimulus in May-June 2013. Known as the taper tantrum, the episode pushed India to the brink of a balance-of-payments crisis.

Since then central bank Governor Raghuram Rajan has steadily built up foreign exchange reserves of $352 billion, up 11 percent from a year ago. By contrast, stockpiles have shrunk in Brazil, Russia and China.

An advisory panel formed by the Reserve Bank of India in 2006 suggested the currency be made fully convertible in five years.

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