Current and Capital Account Convertibility of the Rupee

(c) As regards to the international experience, the Committee found that the countries that had strong fundamentals were less vulnerable to back tracking and the re-imposition of control. (ii) If full convertibility causes appreciation of rupee, the possibility of reduction in exports cannot be ruled out. (vi) If, along with convertibility, there is liberalisation of import of gold, there would be an effective deterrent to the smuggling of gold. (iv) The country should have an appropriate industrial policy and a favourable investment climate. The Government should also set up a Consolidated Sinking Fund (CSF) to reduce Government debt. (xii) Allowing non-residents (other than NRIs) access to Foreign Currency Non-Resident [FCNR (B)] and Non-Resident (External) Rupee Account [NR(E)RA] schemes.

(iv) Overseas investments by SEBI registered Indian investors including Mutual Funds and short- term borrowing by the All India Financial Institutions within limits. (v) Full convertibility of rupee can greatly strengthen the speculative tendencies and consequent instability in the whole system. (iii) The country should have trade-oriented development strategy and adequate incentives for export growth.

Rupee Convertibility: Current and Capital Account Convertibility

Therefore, fuller convertibility of Indian rupee helps to attract FDI and also helps Indian’s to invest abroad. Accordingly, the Tarapore Committee recommended the adoption of capital account convert­ibility. (ii) Discontinuation of limits on trade-related loans and advances by EEFC account holders. (xvi) The requirement of prior approval of the RBI should be replaced with subsequent reporting. Such requirement should be dispensed with in case of disinvestment in a number of cases concerning investments by both residents and non-residents. (xii) There should be development of Treasury bill market and access to financial institutions in it.

(a) Indian companies would be allowed to issue foreign currency denominated bonds to local investors to invest in such bonds and deposits, to issue Global Deposit Receipts (GDRs) without approval of the RBI or Government to go in for external commercial borrowings within certain limits, etc. (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. Among the latter, corporates and non-corporates in those countries received generally the preferential treatment. In the transition to CAC, most of these countries maintained or had to impose some controls on capital inflows.

Better Access to a Variety of Goods and Services

The changes in exports and imports, capital outflows and capital inflows bring about a large fluctuations in foreign exchange rate of rupee. 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. The Committee observed that most countries considered strong balance of payments fiscal consolidation and strengthening of financial system as the necessary prerequisites for the success of capital account convertibility. In the countries studied by the Committee, there was the removal of restrictions on inflows and related outflows by the non-residents and residents. Finally, currency convertibility gives boost to the inte­gration of the world economy. As under currency convertibility there is easy access to foreign exchange, it greatly helps the growth of trade and capital flows between the countries.

Convertibility is the ease with which a country’s currency can be converted into gold or another currency through global exchanges. It indicates the extent to which the regulations allow inflow and outflow of capital to and from the country. Currencies that aren’t fully convertible, on the other hand, are generally difficult to convert into other currencies.

Increased Liquidity in Financial Markets

When the rupee is depreciating too much, Reserve Bank of India intervenes and sells dollars from its reserves of foreign exchange. This increases the supply of dollars in the market and prevents the depreciation of the rupee. The major difficulty with the Tarapore convertibility of rupee implies Committee recommendation was that it would like the capital account convertibility to be achieved in a 3 year period – 1998 to 2000. The period was too short and the pre-conditions and the macroeconomic indicators could not be achieved in such short period.

In case of the remaining 40 percent of receipts, the rate applicable was the official rate of exchange. Amid a lack of suitable regulatory control and rates subject to open markets with a large number of global market participants, high levels of volatility, devaluation, or inflation in forex rates may happen, challenging the country’s economy. However, Indians still require regulatory approval if they want to invest an amount above a pre-determined threshold level for the purpose of investments or purchasing assets overseas. Similarly, incoming foreign investments in certain sectors like insurance or retail are capped at a specific percentage and require regulatory approvals for higher limits.