Finance Minister P Chidambaram on Tuesday said full convertibility of the rupee would be made in a gradual and sequenced manner.
“The movement towards fuller convertibility of the rupee will necessarily have to be gradual, sequenced and calibrated to the overall macro-economic situation and emerging needs of the economy,” Chidambaram told the Rajya Sabha.
The broad principles of careful monitoring and management of exchange rates guide the exchange rate policy of the Reserve Bank of India (RBI), without a fixed, pre-announced target or a band, coupled with the ability to intervene as and when necessary, he added.
“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”, Chidambaram said.
Excess volatility in foreign exchange markets is contained through intervention when necessary, followed up by sterilisation of liquidity through issuance of treasury bills or dated securities under the market stabilisation scheme, he said.
The finance minister said the RBI has been sterilising the liquidity impact of such foreign exchange purchases, placing emphasis on price stability and anchoring inflation expectations.
Point-to-point inflation, as measured by the wholesale price index (WPI), declined from over 6 per cent in the early months of this year to 4.45 per cent for the week ending July 2007.
Under the existing policy, rupee convertibility is allowed in current account transactions such as foreign exchange requirements for overseas travel, but capital account transactions have to be approved by the RBI.
The rupee was made partially convertible in 1994. Fears about leaving the economy vulnerable to global economic shocks have held policymakers back from making the rupee fully convertible. The rupee has been appreciating sharply against the US dollar from September last year.