Currency Convertibility

CURRENCY CONVERTIBILITY
What it is ? Convertibility essentially means the ability of residents and non-residents to exchange domestic currency for foreign currency, without limit, whatever be the purpose of the transactions. Types Of Currency Convertibility.
Fully convertible currency.

Partially convertible currency.

Non-convertible currency .

Rupee Convertibility

CURRENT ACCOUNT
Transactions relating to: - Exchange of goods and services - Money transfers - Transactions that are classified in the Current Accounts. In Short, Current account includes all transactions, which give rise to or use of our National Income.

CURRENT ACCOUNT TRANSACTIONS

All imports and exports of merchandise. Invisible Exports and Imports (sale/purchase of services) Inward private remittances (to & fro) Pension payments (to & fro)

Government Grants (both ways)

CURRENT ACCOUNT CONVERTIBILITY

Indian scenario - fully convertible.

Full freedom to both residents and non-residents.

RBI has placed a cap in creation of a capital asset Freedom in respect of payments and transfers for current international transactions.

CAPITAL ACCOUNT
Inflows and Outflows of capital. Borrowing from or Lending to aboard. Sales and Purchase of securities aboard.

CAPITAL ACCOUNT TRANSACTIONS

Capital Direct Foreign Investments. Investment in securities. Other Investments. Government Loans.

Short-term investments.

Capital Account Transactions Classification Portfolio Investment . Stocks, Bonds, Bank Loans, Derivatives. Direct Investment. Real estate Production facilities Equity investment.
Other investment.

Holdings in loans Bank accounts Currencies

CAPITAL ACCOUNT CONVERTIBILITY

Floating Exchange Rate.

What is means? Freedom of Conversion

CAC allows anyone to freely move from local currency into foreign currency and back. Changes of ownership in foreign/domestic financial assets and liabilities. Advantages !

CURRENTLY RESTRICTIONS : CAPITAL ACCOUNT

Limits to companies borrowing abroad. Restriction on foreigner investing in India. Restriction on amount that FII can hold. Purchasing a company is allowed but limit exit on the amount that can be send. Global Diversification of household portfolio is practically non-existent.

LIMITS TO PARTIAL CAC

Limits specified by the RBI:-

Private visit
Business travel Gift or donation Employment /For studies abroad Investment : Foreign stock markets Borrowings

REASONS FAVORING FINANCIAL OPENNESS & CAC

Diversification NRI Remittances Foreign Investment in

Catalyst for financial market, institutional development, competition, new technologies & discipline macroeconomic policies.
Reduction in the size of Black money. Induces competition against Indian finance.

REASONS FAVORING RESTRICTIONS

Good times- More inflow; Bad times- More outflow. Misallocation of Capital inflows. Export of domestic Savings. Entry of Foreign banks can create Unequal playing field.

Highly volatile international finance (hot money)Higher speculation.

TARAPORE COMMITTEE
Pre-Conditions
Gross fiscal deficit to GDP ratio to come down from a 4.5 %n 1997-98 to 3.5% in 1999-00. A consolidated sinking fund has to be set up to meet government's debt repayment needs; financed by RBI.

Inflation rate to be at 3-5 per cent for the 3-year period 1997-2000 .
Gross NPAs of the public sector banking system needs to be brought down. Average effective CRR needs to be brought down from the current 9.3% to 3% .

Contd...
RBI should have a Monitoring Exchange Rate Band of plus minus 5% around a neutral . Real Effective Exchange Rate RBI should be transparent about the changes in REER .

External sector policies should be designed to increase current receipts to GDP ratio .
Four indicators should be used for evaluating adequacy of foreign exchange reserves to safeguard against any contingency.

Any Questions...?