Prime Minister Manmohan Singh's plans to end India's remaining currency controls will boost confidence and investment in a fast growing economy which now allows the government more leeway on the rupee, officials and analysts said Monday.
"This is a confidence-boosting measure and comes as a pleasant surprise," said Bidisha Ganguly, chief economist with BRICS Securities. "We had expected the issue to be covered in the recent federal budget."
The Reserve Bank of India is likely to announce steps on making the rupee fully convertible in the coming days, Finance Minister Palaniappan Chidambaram said Monday, echoing Singh's comments Saturday.
"The prime minister has made a very definitive statement (on a rupee float) ... and the (Reserve Bank) and government would in the next few days announce the next steps," Chidambaram told business leaders Monday.
The rupee, which currently trades at almost 45 to the dollar, is now convertible on the current account which allows companies and individuals to buy foreign currencies for offshore goods and services.
However, it is not fully convertible on the capital account, which includes fund and investment flows that are now restricted.
Singh and Chidambaram, citing foreign currency reserves of more than 144 billion dollars, said allowing the currency to trade freely whould enable easier repatriation of earnings and so boost foreign investment.
Analysts said the move would make it easier for foreign funds to invest here, which would help India bridge chronic budget deficits and lead to lower inflation as competition increased.
Chidambaram Monday said he is confident of bringing India's fiscal deficit to 4.1 percent of Gross Domestic Product (GDP) at the end of this financial year to March 31, below a target of 4.3 percent.
"With fiscal deficit measures announced and inflation steady, there is greater comfort today. The overall picture allows for gradual (reform) steps to be introduced," said Sanjeet Singh, an analyst with ICICI Securities.
"Overseas fund flows (including foreign direct investment or FDI) are robust and there is greater strength seen through India's external commercial borrowings," Singh said.
India's economy is expected to grow 8.1 percent in the year ending March 31, up from 7.5 percent the previous year, with FDI put at around 7.0 billion dollars, almost double.
In 2005, India got a record 10.7 billion dollars in foreign portfolio investment, mainly in its stock market, and has chalked up 3.4 billion dollars in new investments since the start of 2006.
