Rupee Convertibility
Convertibility of the Indian rupee …..
What it means? ..
It means anyone holding Indian rupees in any amount can convert it to other currencies like the American dollar, the Euro, the Japanese Yen or the Pound Sterling of the U.K., on 24X7 basis round the year. We can buy a bottle of Coke in any remote village of Africa, if we have any of the above four currencies. But, the Coke dealer is more likely to refuse to accept the Indian rupee for the Coke he sells. This reluctance to have our Indian rupee accepted as the means of payment is true for multi-million dollar transactions related to import-export trade.
The reason is simple. The Rupee is not an international currency. It is not freely convertible. One needs the permission of the Reserve Bank of India to convert large amounts of rupees to convert large amounts of Indian Rupees to any other international currency. The Indian rupee is acceptable at its face value within the geographical borders of the country. Outside India, it does not become altogether worthless, but loses its value sharply.
What will India gain by making the Indian Rupee convertible?
India will gain immensely by making the Rupee fully convertible. Inflow of foreign investments in the form of FDI and FII will rise sharply. That means rapid industrialization, more jobs, more exports and more revenue for the government. It is a rosy situation indeed.
What will India lose by making the Rupee freely convertible? …
It may bring total financial disaster to the country in a matter of days! Speculative currency traders can buy up Indian rupees in huge amounts and then release them in the market in equal manner. In such a case, the value of the Rupee will nosedive in the market. To avoid such a crash of the Rupee, the RBI will have to pump in dollars in huge amounts to buy up the excess Rupee being offered for sale. For this, the RBI will need to spend its dollar reserves. But, the RBI’s dollar reserve is limited. After a few days, the RBI
What it means? ..
It means anyone holding Indian rupees in any amount can convert it to other currencies like the American dollar, the Euro, the Japanese Yen or the Pound Sterling of the U.K., on 24X7 basis round the year. We can buy a bottle of Coke in any remote village of Africa, if we have any of the above four currencies. But, the Coke dealer is more likely to refuse to accept the Indian rupee for the Coke he sells. This reluctance to have our Indian rupee accepted as the means of payment is true for multi-million dollar transactions related to import-export trade.
The reason is simple. The Rupee is not an international currency. It is not freely convertible. One needs the permission of the Reserve Bank of India to convert large amounts of rupees to convert large amounts of Indian Rupees to any other international currency. The Indian rupee is acceptable at its face value within the geographical borders of the country. Outside India, it does not become altogether worthless, but loses its value sharply.
What will India gain by making the Indian Rupee convertible?
India will gain immensely by making the Rupee fully convertible. Inflow of foreign investments in the form of FDI and FII will rise sharply. That means rapid industrialization, more jobs, more exports and more revenue for the government. It is a rosy situation indeed.
What will India lose by making the Rupee freely convertible? …
It may bring total financial disaster to the country in a matter of days! Speculative currency traders can buy up Indian rupees in huge amounts and then release them in the market in equal manner. In such a case, the value of the Rupee will nosedive in the market. To avoid such a crash of the Rupee, the RBI will have to pump in dollars in huge amounts to buy up the excess Rupee being offered for sale. For this, the RBI will need to spend its dollar reserves. But, the RBI’s dollar reserve is limited. After a few days, the RBI