The Indian rupee, which is partially convertible, will move toward fuller convertibility in a gradual and calibrated manner, Finance Minister P Chidambaram informed the Rajya Sabha on Tuesday.

“The movement toward fuller convertibility of rupee will necessarily have to be gradual, sequenced and calibrated to the overall macro-economic situation and emerging needs of the economy,” he said in a written reply. Mr Chidambaram was replying to a question by a member on whether government would expedite implementation of the scheme of rupee-dollar convertibility. 

While New Delhi allows rupee convertibility in current account transactions like small foreign exchange needs for travel abroad or education purposes, overseas investments or acquisition of assets, which are classified as capital account transactions, need prior approval of Reserve Bank.

RBI reining liquidity

On whether government and RBI were investing huge money to purchase dollars just to control the appreciation of rupee, the finance minister said the excess volatility in foreign exchange markets was contained through intervention as and when necessary.

He said it was followed up by sterilisation of liquidity through issuance of treasury bills, dated securities under the market stabilisaton scheme.

“The Reserve Bank of India has been sterilising the liquidity impact of such foreign exchange purchases, placing emphasis on price stability and anchoring inflation expectations,” he said.

Point-to-point inflation as measured by wholesale price index declined from 5.94 per cent at end-March 2007 to 4.45 per cent in the week ending July 28, he said.

Guided rate policy

Mr Chidambaram also told members of the House that exchange rate policy of the Reserve Bank of India was guided by the broad principles of careful monitoring and management of exchange rates with flexibility, without a fixed or a pre-announced target or a band, coupled with the ability to intervene as and when necessary.

The overall approach to the management of India’s foreign exchange reserves takes into account the changing composition of the balance of payments and ‘liquidity risks’ associated with different types of flows and other requirements, said Mr Chidambaram.