India's central bank will announce steps aimed at allowing the rupee to become fully convertible against other currencies in the next "few days," Finance Minister P. Chidambaram said yesterday.
"We had discussions on it earlier with" the Reserve Bank of India, the finance minister said.
"We pulled it out of the budget, as it would have overshadowed everything else," he said.
India's Prime Minister Manmohan Singh said on March 18 his government would consider allowing the rupee to trade freely against other currencies, helping to boost overseas investments in the country.
India's currency is only partially convertible, meaning that while the market takes care of most trade-related transactions, investments flowing in and out of India -- also known as capital account transactions -- are subject to restrictions and approval by the central bank.
Singh said such moves would also help India realize its aim to make its business capital, Mumbai, a financial hub in Asia.
Bankers have welcomed the initiative.
"It's a good move and this is the right time to do it since the external sector is quite strong now," said Sanjay Nayar, chief executive at the Indian arm of Citigroup Inc.
India officially fixed the exchange rate until 1991, when it made the first move to allow the market determine the rupee's value in relation to other currencies for select transactions.
Restrictions on most trade-related transactions and remittances were lifted in the following years.
Transactions in some capital assets have also been freed from the central bank's control, but a complete rupee free-float was delayed, fearing the country could face a crisis like the East Asian currency turmoil of 1997. That crisis devalued currencies of many countries, wrecked growth and left thousands of people unemployed.
But India's rising foreign exchange reserves, which now total US$144 billion, and a strong rupee appear to have contributed to the government's latest liberal stance.
Many institutional investors are transferring savings to India because of higher interest rates and a booming stock market, and rising exports have brought in more US dollars and other foreign currencies.
The Indian rupee has appreciated nearly one and half percent against the US dollar so far this year.
Full convertibility will help companies as well, said S. Ramadorai, chief executive officer of Tata Consultancy Services Ltd, India's biggest software company.
"Investments will become easier and delays in foreign-exchange transactions will be reduced," Ramadorai said yesterday.
"It will swell momentum for growth. Investments will become easier because companies are growing through organic and inorganic" methods, Ramadorai said.
The finance minister said the budget for the next fiscal year starting April 1 laid emphasis on manufacturing as part of the government's aim to boost economic growth. He said special attention has also been given to agriculture in the budget, which was presented on Feb. 28.
The fiscal 2007 budget "bets on growth," Chidambaram said.
He expects the gross domestic product growth in fiscal 2007 similar to the last few years.
India expects its economy to grow 8.1 percent in the year ending March 31 following a 7.5 percent gain in the year ended March 31 last year. The government is aiming for 10 percent growth in the next two to three years.
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