FRESH from his success in securing a mandated inflation target, Reserve Bank of India (RBI) Governor Raghuram Rajan has revived another long dormant reform as he seeks to modernize India’s financial architecture: a freely floating currency.

    Rajan called in April for full convertibility in “a short number of years,” having first raised the prospect when he took office in 2013. While it is unlikely to be realized during his current term, he is laying the ground work for it to happen.

    A policymaker familiar with Rajan’s views described convertibility as the governor’s “next big ambitious goal.” The RBI did not have an immediate comment on the subject.

    The move is in tune with the nationalist government’s ambitions to increase India’s weight on the international stage; even if economic fundamentals and political realities mean a freely floating rupees is still years away.

    “It is the right time to take baby steps to move towards capital account convertibility,” said one senior finance ministry official.

    Last month, the RBI allowed companies to raise rupee debt abroad for the first time.

    While the debt will be denominated in rupees, no rupees will leave or enter India as the transactions will be settled in dollars. But this symbolic move towards greater openness will grant Indian companies access to a wider pool of investors, potentially lower borrowing costs and give the rupee more visibility in global markets.

    India’s currency regime is effectively a managed float, meaning there is a currency market, but the RBI intervenes to contain volatility. (SD-Agencies)