Is India Ready for Full Currency Convertibility?

India's political boldness in seeking peace with Pakistan in their half-century twilight struggle for Kashmir may soon be matched by economic moves equally as daring. Indeed, India is edging toward a truly bold reform: full international convertibility of the rupee. How it goes about this will not only effect India's economic development, but provide object lessons for China as it ponders convertibility in the years ahead.

Since 1991 India has been travelling on a path from rupee devaluation to full convertibility, with the Reserve Bank of India (RBI) relaxing a range of foreign-exchange controls. Resident Indians can now maintain a foreign-currency account and invest in shares of foreign companies, while non-resident Indians can repatriate legacy/inheritance assets. Indian companies listed abroad can buy property in foreign countries, and resident firms will be allowed to pre-pay external commercial debt up to US$100 million. Limits on exporters' foreign-currency accounts will be removed, and banks may invest in overseas money and debt markets.

Is India ready for full convertibility? The government is still lagging on its domestic economic reforms. Structural reform and privatization have slowed, eroding investors' confidence. But failure to address structural problems could expose the economy to external shocks in the long term.