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Convertibility can be related as the extent to

which a country's regulations allow free flow

of money inside and outside the country

Convertibility

Convertibility is an important factor in international

trade, where instruments valued in different

currencies must be exchanged

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Where Indian Rupee

convertibility Stand? The Indian rupee is only partially

convertible due to the Indian Central

Banks control over internationalinvestments flowing in and out of the

country

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Types of Convertibility

Current Account Convertibility Current accountconvertibility refers to freedom in respect ofPayments and transfers for current international

transactions

Capital Account Convertibility -capital AccountConvertibility refers to the freedom to convert

local financial assets into foreign financial assetsand vice versa at market determined rates ofexchange

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Historical Background In India till 1990, one had to get permission from

the Government or RBI as the case may be to

procure foreign currency, say US Dollars, for any

purpose

After liberalization began in 1991, the

government eased the movement of foreign

currency on trade account

During the period 1991 to 1995, India movedfrom a fixed exchange rate system to partial float

exchange rate system to a free float or floating

rate market determined exchange rate system.

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Contd..

After the Balance of Payment crisis in 1991, as

part of the IMF's stabilization program, India

moved to a partial float mechanism.

Inward flow of Foreign currency by way of export

were converted to Rupee in the following ratio.

60% at a rate fixed by RBI which was around

Rs.28 to a USD and the balance 40% at amarket determined rate - which was generally

higher at Rs.32 to a USD

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foreign currency for importing goods has to paythe market determined higher rate of Rs, 32 to aUSD

This partial float of the currency was laterchanged to fully floating or a market determinedexchange rate system

After Liberalization government liberalized the

flow of foreign exchange to include items likeamount of foreign currency that can be procuredfor purposes like travel abroad, studying abroad,engaging the services of foreign consultants etc.

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Contd..

There was also simultaneous relaxation on the

restriction on the funds that foreign investors can

bring into India to invest in companies and the

stock market in the country

Indian companies were allowed to raise funds by

way of equities (shares) or debts. The fancy

terms like Global Depository Receipts (GDRs),

Euro Convertible Bonds (ECBs

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Contd..

2009-10 -9.7 RE

2008-2009-3.8 WPI

2010-2011 7%

5.75%