Fed hike may slow India's move to full convertibility

Subject

Capital account convertibility.

Significance

The debate on whether India should render the rupee fully convertible, including on the capital account, has returned following a passing statement recently by Reserve Bank of India (RBI) Governor Raghuram Rajan that India hopes soon to achieve full capital account convertibility. Many factors are encouraging this transition, especially India's comfortable foreign exchange (forex) reserves and large capital inflows.

Impacts

• With China seeking gradually to internationalise the renminbi, Indian authorities may not want to be left behind.
• Unfettered overseas corporate borrowing has exposed these borrowers to currency depreciation.
• The IMF is unlikely to advocate removal of all capital controls.