But this does not mean that one can get any amount of foreign exchange for meeting one’s needs e.g. one cannot convert his savings in the country for investment in foreign exchange as could be done by citizens of developed countries like U.K. A major step in the direction of current account convertibility was adopted by India in March 1993, when the foreign exchange budget was abolished; the exchange rate was unified and; the transactions on trade account were freed from exchange control. The determination of exchange rate of the rupee was left to the market forces.
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- But full convertibility of currency for capital account transactions is still a distant dream.
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- The rupee is partially convertible because it is current account convertible but not capital account convertible.
- As countries become larger players in the global economy, they generally move toward a fully convertible currency to facilitate global economic transactions.
(v) Providing Exchange Earners Foreign Currency Account Holders access to foreign currency current/saving accounts with cheque facility and interest bearing term deposits; (iii) General permission to retain ADR/GDR proceeds, abroad for future foreign exchange requirements. (vi) In the case of resident individuals, the recommendations included the allowing of foreign currency denominated deposits, foreign capital transfer and liberalisation of repatriation norms. (d) The Committee made several recommendations for preparing the financial system for CAC. (iv) A higher exchange rate of rupee can stimulate the remittances by the Non-Resident Indians (NRIs). (iii) In case the exportable products have high import-content, to that extent, a higher market-determined rate of exchange can reduce profitability of exports.
Revision Table: Key Concepts in Rupee Convertibility
In view of the risks involved in the fuller convertibility of the Rupee, the Committee emphasized upon the phased programme of relaxing the capital controls. The time frame for the movement towards fuller convertibility involved three phases- Phase I ( ), Phase II ( ) and Phase III ( ). (iv) Permission to corporates, that have set up their offices and branches abroad, to acquire immovable property overseas for their business/ staff residential purposes.
Tarapore Committee on Capital Account Convertibility
However, this would also come with increased volatility, the risk of businesses becoming burdened by foreign debt, and reduced competitiveness in the global export market. No one knows when the Indian rupee will become fully convertible. As countries become larger players in the global economy, they generally move toward a fully convertible currency to facilitate global economic transactions. However, there are still barriers to full convertibility in India, such as developing a more comprehensive infrastructure for regulating financial markets.
Tax-to-GDP Ratio – UPSC Economy Notes
- Through Capital controls, the RBI controls the foreign capital inflows in the form of loans and equity in India.
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- 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).
All such forex exchanges occurred at pre-determined forex rates finalized by the RBI. A nation’s economy may be related to whether its currency is convertible. Stronger currencies tend to be converted more easily than others, while growth may be stagnant for currencies with poor convertibility because these countries may miss trade opportunities. A convertible currency shows greater convertibility of rupee implies fluctuation than an inconvertible one and thus gives greater scope for destabilising speculation.
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The RBI appointed in 1997 the Committee on Capital Account Convertibility with Mr. S. S. Tarapore as its Chairperson. The Tarapore Committee defined CAC as “the freedom to convert local financial assets into foreign financial assets and vice versa at market-determined rates of exchange.” CAC would permit anyone to move freely from local currency into foreign currency and back. The system of dual exchange rate of the rupee enabled the exporters to convert (at least) 60% of their export earnings at the market rate of exchange which was much higher than the official exchange rate. The GOI expected that this would provide adequate incentive to exporters and increase foreign exchange earnings. In India there are conflicting views regarding whether to move towards full convertibility of capital account or not. At present, there are limits on investment by foreign financial investors and also caps on FDI ceiling in most sectors, for example, 74% in banking and communication, 49% in insurance, 0% in retail, etc.
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For instance, capital account convertibility existed before for foreign investors and Non-Resident Indians for undertaking direct and portfolio investment in India. 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. The cautious approach in respect of full convertibility of rupee was fully justified in view of the Mexican crisis and subsequent East Asian crisis.
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Bhavantar Bhugtan Yojana (BBY) and Telangana Model – UPSC Economy…
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. However, there have been talks of making the rupee (INR) fully convertible and setting up an onshore INR market. The recommendations and subsequent developments highlighted the importance of careful and phased measures to ensure a smooth transition towards fuller capital account convertibility in India. The Government of India has taken the following steps towards capital account convertibility.
The Pros and Cons of a Fully Convertible Rupee
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