A currency (in this case, the rupee) might obtain more acceptance (credibility) around the world by adopting complete capital account convertibility, or the freedom to convert domestic financial assets into foreign financial assets and vice versa. In simple language, capital account convertibility allows any one to freely move from local currency into foreign currency and back. By convertibility of a currency we mean currency of a country can be freely converted into foreign exchange at market determined rate of exchange, that is, exchange rate as determined by demand for and supply of a currency. For example, convertibility of rupee means that those who have foreign exchange (e.g. US dollars, Pound Sterling’s etc.) can get them converted into rupees and vice-versa at the market determined rate of exchange. Capital account convertibility allows free mobility of Capital into a country from the foreign investors.
In this way, deficit in balance of payments get automatically corrected without intervention by the Government or its Central bank. The opposite happens when balance of payments is in surplus due to the under-valued exchange rate. Likewise, the dividends, capital gains, interest received on purchased stock, equity etc. profits earned on direct investment get the rupees converted into US dollars, Pound Sterling’s at market determined exchange rate between these currencies and repatriate them. As it allows converting any foreign receipt into Indian rupees at market determined rates there may be chance that domestic economy will be flooded with foreign exchange which in long run may damage the financial health of an economy.
The degree of convertibility directly impacts a nation’s economic health and its position in the international market. It is a reflection of a country’s economic stability, regulatory environment, and the confidence that the rest of the world has in its currency. Capital account convertibility implies the right to transact in financial assets with foreign countries without restrictions. When there is completely free capital account convertibility, an Indian can dispose of his assets in India and take the money out of the country without hindrance. Full convertibility of rupee was not introduced by the government as it was risky in the conditions of large deficit on current account faced by the country. Moreover, the intention was also to make the foreign exchange available at low prices for making essential imports.
National Income – Economy for UPSC
He currently researches and teaches economic sociology and the social studies of finance at the Hebrew University in Jerusalem. The Indian rupee (INR) is a separate currency from the Nepalese rupee or the Pakistani rupee. We see that the Tarapore committee came up with some not from this world recommendations. It was not a good idea to ignore the prerequisites so CAC was not translated into reality.
- This concept holds significant importance in international trade, investment, and economic policy, as it affects the flow of capital in and out of a country.
- The advent of digital currencies has ushered in a new era of financial innovation, challenging traditional notions of currency convertibility and its role in global trade.
- It means all exports and imports of merchandise and invisible (like services etc).
- (b) Indian residents would be permitted to have foreign currency denominated deposits with banks in India, to make financial capital transfers to other countries within certain limits, to take loans from non-relatives and others upto a ceiling of $ 1 million, etc.
- The interesting thing about the Greek controls is that the country is an EU member and uses the euro, so the capital controls did not actually affect the currency convertibility as Greece is just one part of the economies underlying the euro.
One of the most important factors that determines the success of any marketing strategy is the… (viii) Permission to the authorised dealers to allow remittance, with regard to transfer of assets in India up to U.S. $ 1 million out of balances held in NRO accounts/sale proceeds of assets, subject to Indian taxes. (iv) Permission to corporates, that have set up their offices and branches abroad, to acquire immovable property overseas for their business/ staff residential purposes. (xii) There should be development of Treasury bill market and access to financial institutions in it. (x) There should be deregulation of deposit rates with the removal of minimum period restrictions.
UPSC Civil Services Examination Previous Year Question
There would be no limit on inflow or outflow of capital for various purposes including convertibility of rupee implies investments, remittances, or asset purchases/sales. India’s currency, the rupee, is not yet a fully convertible currency, meaning there are still restrictions that make it difficult to buy or sell in the foreign exchange (forex) market. No one could keep foreign exchange without the knowledge and due permission of RBI. The exchange control consisted of restrictions on the purchase and sale of foreign exchange by general public and payments to and from non-residents.
Why is the need for Internationalisation of Rupee?
Firstly, since market determined exchange rate has been generally higher than the previous officially fixed exchange rate, prices of essential imports rise which may generate cost-push inflation in the economy. Secondly, if currency convertibility is not properly managed and monitored, market exchange rate may lead to the depreciation of domestic currency. If a currency depreciates heavily, the confidence in it is shaken and no one will accept it in its transactions. In a way, capital account convertibility removes all the restrains on international flows on India’s capital account. In addition, Indian investments abroad upto U.S. $ 64 million were eligible for automatic approval by the RBI subject to certain conditions. It is therefore prudent to undertake capital account convertibility only sometime after experimenting with the current account convertibility.
Another merit of currency convertibility ensures production pattern of different trading countries in accordance with their comparative advantage and resource endowment. It is only when there is currency convertibility that market exchange rate truly reflects the purchasing powers of their currencies which is based on the prices and costs of goods found in different countries. A currency may be convertible on current account (that is, exports and imports of merchandise and invisibles) only. In India there are conflicting views regarding whether to move towards full convertibility of capital account or not.
The Indian rupee is a different currency from the Pakistani rupee (used in the Republic of Pakistan) and the Nepalese rupee (used in the Federal Democratic Republic of Nepal).
The ability to exchange a currency for another with minimal restrictions is crucial for global commerce, but it also exposes countries to the volatility of currency markets. Fluctuations in exchange rates can significantly affect the cost of imports and exports, impacting trade balances and economic stability. Moreover, the ease of currency conversion can lead to capital flight, where investors rapidly withdraw their assets from a country, potentially leading to a financial crisis. Referred to as ‘Capital Asset Liberation’ in foreign countries, it implies free exchangeability of currency at lower rates and an unrestricted mobility of capital. Through Capital controls, the RBI controls the foreign capital inflows in the form of loans and equity in India. The current account flows arise out of transactions in goods& services are permanent in nature whereas capital account flows are dynamic in nature and are can be reversed at any time.
