Rupee convertibility is due for a crypto rethink

Source: This post is based on the article “Rupee convertibility is due for a crypto rethink” published in Livemint on 14th Jul 22.

Syllabus: GS3 – Economy

Relevance: Monetary policy and related issues

News: As crypto can weaken state control of capital flows, India’s policy of global integration must remain adaptable. We should not let price instability cramp our options on the external front.

Why price stability is significant?

Overall, it helps keep an economy steady on almost every front.

It would also set a key part of the stage for full capital convertibility.

– It is a market- oriented idea that was left to gather dust after the Asian Crisis of 1997. Open economies bloated by foreign debt saw a reversal of global balances and were thrown into chaos as capital fled amid a currency crash.

– India has kept some limits in place on inflows and outflows ever since, exposing only parts of India’s financial sector to external risk, equity markets far more than debt.

Note: In India, the RBI is entrusted with the responsibility of conducting monetary policy with the primary objective of maintaining price stability while keeping in mind the objective of growth.

What are the price stability settings for India to switch to full capital account convertibility?

These were set out back in June 1997 by the report of a panel on “capital account convertibility” headed by the late central banker S.S. Tarapore.

The report advocated a gradual shift enabled strictly by

– a fiscal deficit kept under 3.5% of GDP

– inflation capped at an average 3-5% by means of a central bank mandate

– the bad assets of lenders—with lending rates fully freed—no higher than 5% of their total.

Further easing of capital controls was to be calibrated by a) the rupee’s trade-weighted rate of exchange, b) India’s balance of payments and c) adequacy of hard reserves (for which it proposed net foreign assets at 40% of currency).

Other criteria

d) Receipts from abroad had to stay on an uptrend, e) external debt service burden suitably low and f) trade gap kept consistent with these.

As of now, India is in no position to turn rupee fully convertible.

Way forward

Yet, India must work towards some abovementioned base conditions to widen its policy options in today’s uncertain times.

To ward off the capital-flight risk, India needs to achieve macro stability. It should reduce every incentive for money to be swiped into a digital store-of-value (Crypto) that’s globally accessible with such ease.