Think.Nxt With Raghav: Why India Must Act Now to Make Rupee Fully Convertible

How convertible is the Indian rupee and what's the road ahead? Tune in to hear Raghav Bahl's take on it.

5 min read

In this episode of Think.Nxt Shorts, The Quint's Editor-in-Chief Raghav Bahl furthers the idea of convertibility of the Indian rupee.

But wait, what's that? In simple words, it is the usability of your currency for foreign transactions.

Defining it as one of the most emphatic symbol of a country’s economic strength, Bahl said, "The fact that other countries, other citizens want to hold their wealth, their savings and their reserves in your currency," boils down to the question:

"How convertible is your currency?"

The US dollar stays at the top of the chart in terms of convertibility, followed by the British pound, euro, Swiss franc, Japanese yen, and so on.

"All these currencies have one thing in common. They are fully and seamlessly convertible," Bahl explained.

  • US dollar accounts for 60 percent of global trade and foreign currency reserves.



Apart from the above-mentioned currencies, there has been a gradual increase in the 'internationalisation' of other currencies – i.e., the dollar is ceding space at the rate of 1-1.5 percentage points every year, and this space is being gobbled up by a welter of other currencies, including the Chinese yuan and the Indian rupee.

Big Picture: The Chinese economy is going through a tough time as it stares at deflation. Moreover, it is also dealing with a huge crisis in it real estate sector, with some big companies defaulting.

On the other hand, Bahl elucidated, "India is right now in the pink of macroeconomic health." Sample this:

  • India's foreign currency reserves is nearly $600 billion.

  • Its debt to GDP ratio is very low (China's debt to GDP ratio is very high).

  • India has never defaulted on any overseas debt obligation.

All of this gives India an opportunity to 'internationalise' the rupee, Bahl remarked.


How Do We 'Internationalise' the Indian Rupee?

Before discussing the road ahead, let's take a glimpse into the past.

Bahl explained that how until the 1990s, the Indian rupee was a rigidly controlled currency, which was one the reasons behind the foreign exchange crisis in early 1990s.

This lead to the realisation that India now needs to float the rupee. "In the early 1990s, we made very purposeful and determined strides. For instance, the rupee was made entirely convertible on the current account. Moreover, there was a conditional opening on the capital account as well."

He further added that, "The rupee was made fully convertible on the Indian stock market. This was a very strong move that Indian policymakers made at that time. As a result, there was rush of foreign capital into India's stock market and the equity markets boomed."

"The next logical step would have been to make the rupee fully convertible on the capital account – i.e., allow Indians to buy and sell foreign assets freely, i.e. buy Apple shares, companies, properties in America, Europe wherever. Likewise, allow foreigners to buy and sell Indian assets freely," Bahl remarked.

However, we were unable to do this because of the Asian currency crisis of the late 1990s, followed by 9/11, and the American sub-prime mortgage crisis of 2008.

All of this effectively caught the 'internationalisation' of the Indian rupee in a status quo, he added.

We did make small moves – like liberalising Overseas Direct Investment rules – but we were nowhere near full capital account convertibility.



In 2019, the government tried to break the status quo by announcing that India would launch a 'Sovereign Dollar Bond'. The bond would have allowed foreign investors to engage with Indian assets. As a result, it would have been a good move to break the above-mentioned status quo.

However, the move was criticised by the people across ideological lines, saying it would expose the Indian economy to huge risks.

"I couldn't get it. We were talking about $10 billion, i.e., only three percent of India's foreign exchange reserves. Moreover, it was only 10 percent of government's gross borrowing programme that year. It was a tiny calibrated move. But there was such a deafening chorus against the move that the government literally got scared and abandoned it," Bahl remarked.


Cut to 2023, JP Morgan announced that it will include Government of India (GoI) bonds in its Global Bond Index for Emerging Markets (GBI-EM).

It straightaway gave it a 10% weight – the same as China!

"This could easily bring in $20-30 billion of passive and active flows over two years," Bahl explained.

It’s also expected that Bloomberg Index will follow suit, pulling in another $20-30 billion.

"Therefore, $50-60 billion of overseas capital could flow into the Indian government bond market in coming two years. It would open up $50-60 billion of domestic saving for the private sector; it will bring the interest rates down; and it will also strengthen the rupee. All very positive."
Raghav Bahl

All of this, because of the more confidence displayed by the foreigners than by our own policymakers.


The Road Ahead

Bahl further argues that, "Now it is time that we reciprocate the confidence shown by foreigners by bring back the US dollar bond on the table. I think, the Government of India should now announce a $20 billion programme (after aborting a $10 billion programme in 2019.)"

And when the government does, there will be a deafening chorus against it again. The same naysayers will demand to abandon it, but the government should not abandon it," Bhal remarked, further addressing each criticism against it, one by one.

  1. The cost in rupee of a dollar bond is unquantifiable. "It is not unquantifiable as it can be hedged," Bahl argued.

  2. Why go overseas when the foreigners are already in India? For that, he explained, "When GoI launched sovereign dollar bonds on foreign stock markets, they are accessing an entirely new category of investors. Therefore, it is additive."

  3. What if India defaults or imports an economic contagion? "That is more likely to happen when foreigners invest in India. On the contrary, when you ask foreigners to invest in your assets overseas, then all the gyrations will stay overseas and the contagion will not be imported to India," he elucidated.

  4. Why not just ask the RBI to cut the repo rate? "If you only free markets could be dictated so easily... Then why would anybody do all of this?" Bahl stated.

Therefore, it's about time, we Think.Nxt and bring back the dollar bond, as the first step to further the 'internationalisation' of India rupee, and then, in a period of next three to five years, we take all steps necessary to make the rupee, fully convertible.

Camera: Athar Rather

Video Producer: Zijah Sherwani

Editorial Producer: Aakriti Handa

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Topics:  Rupee   US Dollar   Indian Rupee 

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