Rupee convertibility on capital account

Currency convertibility refers to the freedom to convert the domestic currency into other internationally accepted currencies and vice versa. Current account convertibility means freedom to convert domestic currency into foreign currency and vice versa to execute trade in goods and invisibles. On the other hand, capital account convertibility implies freedom of currency conversion related to capital inflows and outflows.

Rupee convertibility on capital account

The Reserve Bank of India RBI has made a strong case for internationalization of the rupee and sought to differentiate it from capital account convertibility. May 18, According to the central bank countries that can borrow in their own currency are less susceptible to international crisis.

According to the central bank ED, internationalization of the currency refers to a state where exporters from other countries agree to take payment in rupees and where the currency risks in international borrowings are borne by lenders rather than borrowers in India.

Padmanabhan's remarks come at a time when the government is encouraging corporates to issue rupee-denominated debt to reduce foreign currency risks.

According to investment bankers several top-rated corporates are looking at this option. He pointed out that capital account convertibility would bring with it both long-term investment in projects as well as short-term hot money that sought to take advantage of market volatility.

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In fact Malaysia did precisely this to check deepening of the crisis with success. However at that time it was considered an unorthodox and anti-market policy prescription," he said. Since then capital controls have gained in acceptance and in capital controls were a key component for Iceland's revival package.

While there was no compelling case for capital account convertibility, Padmanabhan said that India needs to prepare for it as it is inevitable with globalisation. While there are risks associated with full capital account convertibility, resisting liberalisation over an extended period may prove futile and counterproductive.

Transfer pricing is one of the methods which corporates may employ to get around capital account restrictions.

Rupee convertibility on capital account

In any case, keeping any restriction for too long is self defeating as people end up finding new methods of bypassing that restriction," he said.Capital account convertibility is a feature of a nation's financial regime that centers on the ability to conduct transactions of local financial assets into foreign financial assets freely or at country determined exchange rates.

It is sometimes referred to as capital asset liberation or CAC. The Indian rupee (sign: ₹; code: – A panel (set up to explore capital account convertibility) recommended that India move towards full convertibility by , but the timetable was abandoned in the wake of the – East Asian financial crisis.

Capital account convertibility or CAC refers to the freedom to convert local financial assets into foreign financial assets or vice versa at market-determined rates of CAC is introduced along with current account convertibility it would mean full convertibility.

Oct 22,  · Capital account convertibility means the freedom to convert a currency for capital transactions and the rupee is not fully convertible on that front yet, though capital flows have been liberalised Author: Vikas Dhoot.

Unlike current account convertibility, capital account convertibility does not come without a downside.

Rupee convertibility on capital account

But before we discuss the downside it will be in order to point out that reservations have been expressed about the most important contribution of capital account . Jul 08,  · In this lecture, we will discuss convertibility of Indian Rupee and we will also understand what are current account transactions and capital account transactions.

Currency Convertibility: Advantage, Benefits and Preconditions for Capital Account Convertibility