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Huge forex reserves may speed full convertibility

Record foreign exchange reserves and a firming rupee will give the Reserve Bank of India room to move towards a free float faster, analysts said on Saturday.

India's foreign exchange reserves rose by $755 million to touch a record high of $65.376 billion in the week to November 8 on increased dollar remittances by exporters, foreign direct investments and inflows from expatriate Indians.

"The reserves situation is so comfortable that the RBI will progressively relax more capital account controls and perhaps speed up the pace towards a free float," said Sanjeet Singh, economist at ICICI Securities and Finance Company.

The Indian rupee is fully convertible on the current account but only partially convertible on the capital account and is tightly policed by the central bank.

The reserves, details of which were released by the Reserve Bank of India on Saturday, are enough to cover imports for a year.

"Apart from trade and expatriate inflows, the reserves would have gained from the dollar's overseas weakness also," said a trader at a large foreign bank.

In the week to November 8, the dollar shed 1.6 percent to the euro and 1.9 percent to the yen.

Although the RBI does not disclose the composition of reserves, it includes the effect of appreciation or depreciation of all major currencies against the dollar on the reserves.

The dollar's recent weakness has left the Indian currency undervalued by about three percent on a trade-weighted basis, prompting exporters to step up dollar remittances amid hopes that the local unit will gain more.

The rupee ended at a 10-½ month closing high of 48.20/21 per dollar on Friday, firming on news that Moody's Investors Service might upgrade the country's foreign currency debt rating due to its favourable external situation.

The unit has now gained 1.8 percent from its life low of 49.08 hit in mid-May and most of the dollar inflows have been absorbed by the central bank which is keen to maintain the competitiveness of Indian exports and build up forex reserves.

Moves towards free float

"The record reserves will give the RBI confidence to ease more capital account controls," said M R Madhavan, analyst at Bank of America.

The central bank has been steadily relaxing foreign exchange rules, and on Friday it announced a slew of measures, which reflected its growing confidence about the external sector.

It allowed overseas funds to hedge their entire foreign currency exposures arising from investments in Indian equities instead of just 15 percent earlier.

It also allowed Indian banks to invest up to 50 percent of their equity capital or $25 million, whichever is higher, in overseas money market or debt instruments, up from the earlier limit of 25 percent of their equity capital or $15 million.

These measures followed moves earlier in the month, when RBI allowed Indian residents to deposit foreign currency obtained abroad -- through payments received for services provided, honorariums or gifts and residual travel money -- in domestic current accounts with no ceiling.

In September, the central bank allowed Indian firms to borrow up to $50 million from global sources without government approval and allowed them to prepay foreign loans ahead of schedule.

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