Sunday, September 10, 2006

>Rupee float to start a merry-go-round

India's planned move towards full convertibility of the rupee will facilitate cross-border movement of capital, much of which could flow into the GCC's property and capital markets, experts and Non-Resident Indians (NRIs) here said.

It is also a decisive step towards deriving the best from the enterprise of Indians living overseas, they said.

"The removal of all controls on the movement of capital is a move in the right direction provided it is implemented in the right spirit," said Shailesh Dash, head of research at Kuwait's Global Investment House.

"The free float would allow Indians [individuals or companies] to invest or acquire assets outside India or foreigners to remit funds for investment or acquisition of assets."

With the real estate and stock markets opening up to foreign investment in the Gulf states, cash-rich Indians could divert funds here, Dash told Gulf News.

India's central bank governor last week announced that steps would be taken towards fuller rupee convertibility in three phases starting next year.

India made the rupee convertible on the current account in 1994, meaning that the currency could be converted freely for specific purposes such as trade-related expenses, business travel etc. But it still cannot be converted freely into foreign currency to buy overseas assets such as shares or real estate. Banks cannot accept deposits in many foreign currencies, and approval is needed for movement of capital across borders.

"Essentially, full convertibility would lead to an exit of capital from India as well as attracting capital into India," said P. Krishnamurthy, Chief Executive of the Financial Services Division of the Al Rostamani Group.

Foreign companies will be allowed to buy 100 per cent stakes in Indian companies and that would attract foreign investment in India, and Indian companies could invest up to 400 per cent of their net worth abroad, he said.

"The GCC is already flush with liquidity that is looking for investment avenues. With full convertibility, India could suck in this liquidity. On the other hand, Indian mutual funds will seek opportunities in the Middle East among other markets. So there could be inflows into the capital markets here."

Moreover, due to tax benefits, new laws and investor-friendly regulations, the Gulf's property sector would seem a magnet for Indians.

"The Gulf, particularly the UAE, is the first point of destination abroad for many Indians, especially in recent years, due to higher taxation and strict scrutiny in the West," said Krishnamurthy.

Dash concurred that the Gulf's property sector could attract investment from Indians following full convertibility of the rupee, but he said appreciation of property is higher in India.

"The Gulf's property market may seem an attractive proposition for many Indians, especially businessmen, but there is the need for more clarity on the laws relating to leasehold or freehold," said N. Janardhan, Programme Manager GCC and Asia at the Gulf Research Centre.

"Even if investments pour into the property sector here they might be speculative investments, not for the long term."

As with most developing economies which have full convertibility, including many South-East Asian nations, rupee convertibility would diminish India's grip on the money supply, and would make necessary continuous monitoring and deterrence aimed at flows related to terrorism, crime and money laundering.

"This would be a big concern for policymakers in India at the moment and India would also have to address how to integrate itself into the global currency markets," said an Indian money exchange house executive in Abu Dhabi.

But as Krishnamurthy emphasised, in the long run it is a win-win situation for India as well as for other countries.

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