Rupee’s Flight

There has been much talk about India pushing to make Rupee acceptable for settlement of bilateral transactions. India and UAE signed an MOU for settling bilateral trade in rupee and dirham. It is a good beginning although there are those who doubt that the MOU will really have much effect. Russia has been selling crude against payment in Rupee in recent times, although there are murmurs that Russians are not too happy with sitting on piles of Rupee with very little use for that. Unless a larger number of countries start accepting Rupee for settling bilateral transactions, or India becomes a net exporter of goods and services, there is little chance of Rupee really becoming a global currency. But that is not the only problem. When I started practicing law in 2004, I primarily did FEMA advisory. Those were the days when if one kept regular tab over FEMA notifications and circulars, one could predict with near certainty the trajectory the FEMA regulations were likely to take in near future. There was much talk about Rupee becoming fully convertible in the medium to short term, and it seemed like RBI and the government were slowly and steadily moving in that direction. Then 2007 economic crisis hit the world, and there was a pause. Since then, much has changed in the Indian economy, but FEMA has not kept up with the pace of liberalization that one saw in the earlier part of the decade of 2000.

Many would argue that FEMA as a regulatory tool to control foreign exchange has held India in good stead in as much as Rupee has not seen the kind of collapse that many other currencies have seen. But that in my view is a defensive argument, not one that befits a country that wants its currency to have global acceptance. The motivations that drive those administering FEMA vary. Protectionism drives sectoral caps and local sourcing requirements; quantitative limits on remittances are driven by the need to prevent currency volatility, while limits on external debt inflows are driven by fear of ‘systemic risks’ to the economy. Unfortunately, the administrators, namely RBI and the Government, are ever suspicious of people finding a way around, which leads to layers of regulations which are often kept vague to help those administering take interpretations. Changes in FEMA regulations are often announced at the spur of the moment, with little formal discussion, many a times through circulars, while formal amendments to the actual Rules and Regulations following much later. This has been made possible by the construct of FEMA which allows the Central Government and the RBI full latitude.??Although in theory the Rules and Regulations are to be tabled in the Parliament which has the right to make changes, but I do not know of a single instance when the Parliament has exercised its right to correct a wrong.???????

The control that FEMA exercises over cross border transactions is such that Indian party could with ease take the position that we cannot make the payment due to regulatory concerns under FEMA. One has to only recall the Tata-Docomo dispute, where Docomo struggled to enforce an arbitral award in its favor because FEMA regulations came in the way.??

The control that RBI and the Government exercise over Rupee is such that there is always a doubt if Rupee’s exchange rate reflects its true value, this does not augur well for a global currency. Relative comparisons with Renminbi in this regard may not be appropriate, for China stands in a different relation with the economies where it can force trade settlement in Renminbi, voluntary acceptance of Renminbi remains low. If the Indian Government is truly serious about its objective of making Rupee a globally acceptable currency, it may perhaps look at clipping its own wings and those of the RBI to bring greater certainty to the regulatory framework. Controls over capital account transactions should precede greater discussion, perhaps, even a parliamentary approval. Temporary controls over capital account transactions should be with clear objectives and not to address vague concerns, and for a defined period.?

If Rupee has to truly find its place in the pantheon of acceptable global currencies, FEMA has to stay in tune with that aspiration. The Government as policymaker cannot display insecurities through its regulatory architecture while it tries to convince the world that Rupee has arrived, it will be difficult to sell the idea. Hope the mandarins at North Block realize that.?

Sarthak Advocates & Solicitors

#rbi #rbipolicy #fema #rupee #currency #globalcurrencies