To become a truly global economic player, India will need fuller integration into the global economic system. Currencies that aren’t fully convertible are generally difficult to convert into other currencies. These currencies are usually more tightly controlled by a government’s regulatory authority or central bank. Improved access to international financial markets and reduction in cost of capital. (b) The size of the current account deficit should be within manageable limits and the debt service ratio should be gradually reduced from the present 25 per cent to 20 per cent of the export earnings.
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The report of this committee was made public by RBI on 1st September 2006 had drawn up a roadmap for 2011 as the target date for fuller capital convertibility of rupee In this report, the committee suggested 3 phases of adopting the full convertibility of rupee in capital account. Smaller amounts can be freely exchanged or converted, which is useful for smaller transactions like foreign travel or buying goods from other countries. However, larger transactions, such as buying property overseas, still need regulatory approval. Current account convertibility is the next phase for attaining full convertibility of rupee.
Is India Ready?
Convertibility is the ease with which a country’s currency can be converted into gold or another currency through global exchanges. Government of India (GOI) has revised rules pertaining to FEMA and capital account transactions during different periods of time. In context of large capital flows and the upshots of previous modifications during the last few years, GOI and RBI have recently done some additional amendments.
In a way, capital account convertibility removes all the restrains on international flows on India’s capital account. There is a basic difference between current account convertibility and capital account convertibility. In the case of current account convertibility, it is important to have a transaction – importing and exporting of goods, buying and selling of services, inward or outward remittances, etc. involving payment or receipt of one currency against another currency. In the case of capital account convertibility, a currency can be converted into any other currency without any transaction. Convertibility of currency means when currency of a country can be freely converted into foreign exchange at market determined rate of exchange that is, exchange rate as determined by demand for and supply of a currency. For example, convertibility of rupee means that those who have foreign exchange (e.g. US dollars, Pound Sterlings etc.) can get them converted into rupees and vice-versa at the market determined rate of exchange.
Convertibility of Currency in India
Convertibility is the quality that allows money or other financial instruments to be converted into other liquid stores of value. Freely convertible currencies have immediate value on the foreign exchange market, and few restrictions on the manner and amount that can be traded for another currency. In 1992, liberal economic reforms were introduced that impacted the way forex transactions were conducted. Exporters and importers could exchange foreign currencies for the trade of unbanned goods and services. There was easy access to forex for studying or traveling abroad, and, depending on the industry, there were fewer restrictions on foreign business and investments. (c) Convertibility of rupee implies freely permitting the conversion of rupee to other currencies and vice versa.
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Similarly, incoming foreign investments in certain sectors convertibility of rupee implies like insurance or retail are capped at a specific percentage and require regulatory approvals for higher limits. 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. Convertibility is the ease with which a country’s currency can be converted into gold or another currency in global exchanges. It indicates the extent to which the regulations allow inflow and outflow of capital to and from the country.
Capital account convertibility allows the individuals of a nation to invest in abroad by easily converting their rupees into foreign exchange at the rates determined by the Market. This enables those potential domestic investors to acquire & own the assets in abroad. Full convertibility would mean the rupee exchange rate would be left to market factors, without any regulatory intervention. There may be no limit on inflow or outflow of capital for various purposes (including investments, remittances or asset purchase/sale). Full convertibility would mean the rupee exchange rate would be left to market factors without any regulatory intervention.
Additionally, the INR is not a completely free-floating currency left to market dynamics. Regulators will occasionally act to keep the exchange rates within permissible limits. In the case of extreme volatility in rupee exchange rates, the RBI swings into action by purchasing/selling U.S. dollars (kept as a foreign reserve currency) to stabilize the rupee.
- A fully convertible rupee would improve employment and consumer opportunities, help Indian businesses raise foreign capital, and allow India to become a global economic player.
- The opposite happens when balance of payments is in surplus due to the under-valued exchange rate.
- Capital account convertibility allows the individuals of a nation to invest in abroad by easily converting their rupees into foreign exchange at the rates determined by the Market.
- Additionally, the INR is not a completely free-floating currency left to market dynamics.
During mid-1990s, the rupee was made fully convertible for current account for all trading activities, remittances and indivisibles. So in India, there is free regime for current account transactions but still partial convertibility for capital account transactions. Many economics experts are of view that we need full capital account convertibility of currency.
About Capital Account Convertibility:
- Many economics experts are of view that we need full capital account convertibility of currency.
- Government of India (GOI) has revised rules pertaining to FEMA and capital account transactions during different periods of time.
- People wanting to engage in foreign travel, foreign studies, the purchase of imported goods or to get cash for foreign currencies received (like with exports) were all required to go through RBI.
- Plus, a minimum net foreign asset to currency ratio of 40 per cent should be prescribed by law in the RBI Act.
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. Though the Indian government has given indications that it is moving toward a fully convertible rupee, the timeline for that change is currently unknown. Capital account convertibility allows free mobility of Capital into a country from the foreign investors. It allows converting the foreign exchange brought into as Capital to convert into rupees at market determined rates, which makes the investors encouraging.
Until the early 1990s (pre-reform period), anyone willing to transact in a foreign currency would need permission from the Reserve Bank of India (RBI), regardless of the purpose. People wanting to engage in foreign travel, foreign studies, the purchase of imported goods or to get cash for foreign currencies received (like with exports) were all required to go through RBI. All such forex exchanges occurred at pre-determined forex rates finalized by the RBI.
But full convertibility of currency for capital account transactions is still a distant dream. Rupee convertibility refers to the ability to freely exchange the Indian rupee for other foreign currencies or assets without significant restrictions or controls imposed by the Reserve Bank of India (RBI) or the government. It allows for the conversion of rupees into other currencies at market rates, enhancing international trade and investment.
It means all exports and imports of merchandise and invisible (like services etc). A Reserve Bank of India-appointed working group recommended inclusion of the rupee in the Special Drawing Rights (SDR) basket and recalibration of the foreign portfolio investor (FPI) regime to accelerate the pace of internationalisation of the rupee. (c) In September 1995, the RBI appointed a special committee to process all applications involving Indian direct foreign investment abroad beyond US $ 4 million or those not qualifying for fast track clearance. The Indian rupee (INR) is a separate currency from the Nepalese rupee or the Pakistani rupee. Availability of large funds to supplement domestic resources and thereby promote economic growth. Gross NPAs of the public sector banking system needs to be brought down from the present 13.7% to 5% by 2000.
In this way, deficit in balance of payments get automatically corrected without intervention by the Government or its Central bank. The opposite happens when balance of payments is in surplus due to the under-valued exchange rate. India is expected to become a truly global economy in the near future, and it will need a fuller integration into the world economic system. As India continues to expand its role in the global economy, the rupee will likely become fully convertible. However, due to regulatory and financial challenges, this process may take several more years.
