CONVERTIBILITY OF RUPEE

TABLE OF CONTENTS

• WHAT IS CONVERTIBILITY?

• DIFFERENCE BETWEEN CAPITAL & CURRENT

ACCOUNT

• RECOMMENDATIONS BY THE TARAPORE

COMMITTEE

• CAC IMPLEMENTATION INDUSTRY

• ASIAN FINANCIAL CRISIS 1997

• VIEWS ON CAC

• CONCLUSION

DEFINITION

Currency convertibility refers to the freedom to convert the domestic currency into other internationally accepted currencies and vice versa at market determined rates of exchange.

TYPES OF CONVERTIBILITYCurrent account convertibility- Current account convertibility allows

residents to make and receive trade-related payments, i.e. receive foreign currency for export of goods and services and pay foreign currency for import of goods and services like travels, medical treatment and studies abroad.

Capital account convertibility- we mean the freedom to convert the local

financial assets into foreign financial assets.

HISTORY OF RS CONVERTIBILITY

Up to 1991, when India faced a major foreign exchange crisis, there had been very rigid controls on both the capital account as well as the current account.

Current account convertibility was introduced in India in August 1994.

After start of liberalization in1991, India had accepted the IMF rules for currency reforms.

In 1997 the government had set up a committee(Tarapore committee) to spell out a road map for the full convertibility of the rupee.

CONT.

Committee suggested three phases of adopting full convertibility of rupee in capital account.

First phase in 2006 -2007 Second phase in 2007-2009 Third phase in 2009- 2011

FULL CAPITAL ACCOUNT CONVERTIBILITY(CAC)CURRENT ISSUES

Until the Asian crises of 1997-98, there was a growing consensus that controls on global financial flows were harmful and the lifting of such controls would lead to increased flows to emerging markets.

CONT.

Two schools of thoughts have developed in this context.

First school of thought: Complete lifting of controls and equal treatment of

foreign financial institutions. It argue, that liberalization enhances the functioning of the financial services sector.

Second school of thought : Adopt differential treatment based on levels of

development and the adoption of a more orderly and sequenced approach to liberalization in accordance with the levels of developments in financial markets and supervisory system of member countries.

ADVANTAGES OF CAC

More capital available to the country, and the cost of capital would decline.

The freedom to trade in financial assets. Difficult for a country to follow unwise

macroeconomic policies. Tax levels would move closer to

international levels . It will grow competition among financial

institutions.

DISADVANTAGES OF CAC

It could lead to the export of domestic savings. Expose the economy to larger macroeconomic

instability. Premature liberalization could initially

stimulate capital inflows that would lead to appreciation of real exchange rate and thereby destabilize an economy undergoing the fragile process of transition and structural reform.

It may bring low quality investment . It may generate the financial bubble.

IF WE HAVE CAC ?

We will able to freely purchase assets abroad.

We will able to pay the price in foreign currency.

We will able to invest money in foreign capital market without restriction.

We can accept foreign currency for any kind transaction.

CONCLUSION

The volatile nature of capital inflow presents an alarming trend.

Liberalizing capital control may lead to huge dependence on foreign portfolio capital.

Need is to channelize the capital flow.

THANK YOUPRESENTED TOMR. S. K VAZE