Sunday, April 16, 2006

Will India Free the Rupee?

Business Week
In recent times, Indian politicians have expressed a desire to make remove any encumberances from India's currency, the Rupee. While the Rupee can be coverted freely for trade in goods and services, restrictions are placed on international asset acquisition. India's economy is in great shape for such a transition. Economic growth has averaged a very healthy 7-8% over the past five years, while inflation has remained steady at approximately 4-5%. India's foreign reserves currently stand at 144 billion dollars which would cover approximately 13 months of imports. Furthermore, short term debt as a percentage of total debt is also steadily declining.

Freeing its currency has many advantages for India. To begin with, a free currency would give emerging Indian companies access to foreign debt markets, in addition to decreasing delays in foreign exchange trades. The abolishment of capital controls would allow foreign investors greater access to India's banks and debt markets and might boost foreign investment, which despite substantial improvements, lags far behind China. To sustain its current rate of growth, India's Prime Minister has estimated that India would require approximately 70 billion dollars of foreign investment, something that could be realized with the help of a free currency. Moreover, a freely floating currency would remove the last remaining obstacle to India's integration with global markets, and would be "a reflection of the nation's increased self-confidence."

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