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India Moves to End All Controls on Currency

As India's economy grows strongly, the government says it is planning to end all controls on its currency. The move is expected to boost confidence and increase investment in the country.

India first drew up plans to make its currency fully convertible 10 years ago, but abandoned them after several East Asian countries were hit by a financial crisis.

But as the Indian economy booms, the government says the time is right to take a fresh look at relaxing all controls on the rupee.

Financial analysts agree. India's foreign exchange reserves top more than $140 billion. The rupee has been stable and the past two years have seen a surge of interest in India among foreign businesses.

Abheek Barua, chief economist at ABN Amro Bank in Bombay, says lifting controls on the currency will enable India to get more foreign investment to maintain high growth.

"It is a signal to foreign investors that the economy is strong, and typically the experience in other countries has been that with full capital account convertibility, inflows of investment actually pick up," Barua says.

In July, a central bank panel will unveil a road map to end controls on the rupee. Officials say it will be done in phases and complete convertibility may still be three years away.

Now the rupee can only be freely converted for trade in goods and services. Other types of foreign investments, such as acquiring overseas assets, must be approved by the central bank.

Allowing the currency to trade freely makes it easier for Indian companies and workers overseas to send their earnings home. It will open the doors for residents and local businessmen to invest freely overseas and makes it easier for them to borrow money overseas. It also is necessary if the government wants to move ahead with its plans to turn Bombay into a regional financial hub.

Lawrence Summers, the president of Harvard University in the U.S., recently visited India. The former U.S. treasury secretary said the move is inevitable if India wants to become an economic powerhouse.

"Ultimate successful integration with the global economy will require capital account convertibility, so on a success scenario for India the question is not if, the question is when," he says.

Indian central bank officials have cautioned the government to keep inflation low and its fiscal deficit in check if it wants to make the rupee fully exchangeable.

The ambitious step is being described as the country's biggest economic development since sweeping reforms of its socialist-style economy in 1991 helped usher in an era of high growth.