Full currency convertability has been an issue for developing markets around the world. It was this ability to move away from financial markets in a giffy that resulted in the asian crisis of 1997. The whole episode was triggered by a general thinking that asian markets are going to crash, which utimately led to the crash of the 1997. More information on the asian crisis can be found here.
The government of India asssured the public on the stability of indian markets during the crisis mainly pointing to the fact that indian currency was not freely convertable. But a decade is a looong time in finanicial markets.With the proposed full convertability, indian markets have no more the tools to stop such drastic measures.
One the other hand, the move demonstrates the confidence of the government on the fundamentals of the boom. They would argue that indian markets are not dooming due to external funds rather due to domestic investment and savings. Having one of the highest current accounts surplus in the world right now also gives a good deal of confidence.
Finally i would like to end this by quoting a recent Buttonwood column in economist...
India and China might well remain Asia’s great growth stories over the coming years, but Buttonwood is not going to recommend their stockmarkets. In India’s case, that is partly because he sits too far away; partly because its valuations are—possibly justifiably—higher than they are farther east; but mainly because India’s growth story is fast becoming one in which rising asset prices (land, stockmarkets) fuel demand growth, which in turn fuels rising asset prices. India’s stockmarket, in other words, is coming to resemble Japan’s in the 1980s or the rest of Asia’s in the early 1990s. Judging when the inevitable blowout will come requires a sense of timing with which Buttonwood is not equipped.
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