Capital account convertibility refers to the freedom to convert local financial assets into foreign financial assets and vice versa at market determined rates of exchange. The tarapore committee was set up by the reserve bank of india under the chairmanship of former rbi deputy governor s. Capital account convertibility in india special feature convertibility of a currency implies that a currency can be transferred into another currency without any limitations or any control. It is associated with changes of ownership in foreigndomestic financial assets and liabilities and embodies the. Enshrining capitalaccount convertibility in the imfs articles of agreement is an idea whose time has not yet come. Rajans statement last week that the central bank is looking at allowing full capital account convertibility in a few years. Convertibility of money implies a system where a countrys currency becomes convertible in foreign exchange and vice versa. 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 convertibility, that is, its role in better allocation of global savings. Capital account convertibility it means the freedom to convert local financial assets into foreign financial assets and vice versa at market determined rates of exchange. Capital account convertibility allows free movement from local currency into foreign currency and back. India needs full capital account convertibility times. It refers to the removal of restraints on international flows on a countrys capital account, enabling full currency convertibility and opening of the financial system. Current account convertibility current account convertibility refers to freedom in respect of payments and transfers for current international transactions. For the rapid growth of world trade and capital flows between countries convertibility of a currency is desirable.
How did full capital account convertibility lead to collapse of east asian economies in 1997. Meaning capital account convertibility means the exchange of currencies on account of. Full capital account convertibility fcac implies that residents in a country can freelyexchangedomestic currencyfinancial assets against foreign currencyfinancial assets,without any restrictions. It is sometimes referred to as capital asset liberation or cac in laymans terms, full capital account convertibility allows local currency to be exchanged for.
When rupee is fully convertible into another currency, for capital account transactions. Tarapore to lay the road map to capital account convertibility. Arguments in favour and against of capital account convertibility and capital account liberalization. Pitching for full capital account convertibility, the reserve bank has said that with indian economy becoming global it would be hard to maintain capital controls for a long period of time. Capital account convertibility is a feature of a nations financial regime that centers on the ability to conduct transactions of local financial assets into foreign. A free powerpoint ppt presentation displayed as a flash slide show on id. Availability of large funds to supplement domestic resources and thereby promote economic growth. Referred to as capital asset liberation in foreign countries, it implies free exchangeability of currency at lower rates and an unrestricted mobility of capital. In india, recent policy discussions culminating with the publication of the tarapore report 2006 have reopened the debate about the risks and benefits of capital account convertibility. Capital account convertibility is partial because quota restrictions. It means the freedom to convert local financial assets into foreign financial assets and vice versa at market determined rates of exchange. Means the rupee can be freely converted into dollar, pound sterling, yen.
Ppt on currency convertibility current account capital account. This article discusses the terms capital account convertibility and current account convertibility by examining the key aspects of each and by analyzing some real world examples. Tarapore was asked to prepare a road map for capital. Pdf convertibility of capital account the complete elimination of all capital. Difference between capital and current account capital account a capital account refers to capital transfers and acquisition or disposal of nonproduced, nonfinancial assets. Dons answer is perfect, i would just like to expand on the bit he mentioned about destabilisation that can occur with full capital account convertibility as he said with full capital account convertibility portfolio investment from foreign in. In other words, the consensus that every country should eventually move toward a fully free capital account is now broken. International consultants ltd andrew leung currency war and the rmb.
The tarapore committee recommended that, before adopting capital account convertibility cac, india should fulfill three crucial preconditions. The tarapore committee mentioned the following benefits of capital account convertibility to india. An important one is the high frequency and volume of international capital movements across borders which may produce many macroeconomic effects in host countries like india. Capital account convertibility cac is the freedom to convert local financial assets into foreign financial assets at market determined exchange rates. Tarapore committee setup in 199697 capital account convertibility cac committee favored cac as a goal to be achieved in 3 years by 2000 considered too aggressive target by economists 30 years avg by other liberalized nations established road map and benchmarks. Ppt on currency convertibility free download as powerpoint presentation.
Capital account convertibility meaning capital account convertibility definition capital account convertibility explanation. Chinas progress towards capital account convertibility lawrence j. In mumbai, on march 18, 2006, while addressing the audience at the reserve bank of india rbi, he said given the changes that have taken place over the past two decades, there is a merit in moving towards fuller capital account. Shankar acharya macroeconomic policy challenges for india foreign capital surge of 199394 asian financial crisis of 199798 fifth pay commission the. Since 1994, indian rupee has been made fully convertible in current. Currency convertibility is the ease with which a countrys currency can be converted into gold or another currency. Presentation of balance of payment bop, 20002004 millions of us dollars. The key theme in this article is that emerging economies must decide on convertibility only according to their internal assessment and not because of external pressure. Even the finance minister acknowledged this point that the idea of capital account convertibility was floated in 1997 by the tarapore committee, but could not be implemented as the asian crisis cropped up. To prepare roadmap towards full capital account convertibility fcac, tarapore committee was setup at the behest of prime minister dr. Improved access to international financial markets and reduction in cost of capital.
For example, if india had fcac in place, as an indian we could freely buy us dollars by selling rupee, for any reason, without any restrictions. Tarapore committee and why time not yet ripe for implementation of full capital account convertibility in india. Now the time has come to set forth on a path to capital account convertibility. Benefits of capital account convertibility to india. Exchange rate, capital account convertibility, foreign.
Capital account convertibility capital account reserve bank of. Capital account convertibility free download as powerpoint presentation. Currentaccount versus capitalaccount convertibility. Currency convertibility is extremely important for international commerce. Capital account convertibility is a feature of a nations financial regime that centers on the ability to conduct transactions of local financial assets into foreign financial assets freely or at market determined exchange rates. According to the tarapore committee provided a succinct and subtle definition. India should opt for full capital account convertibility at this stage as these are good times when inflation is low, when our exports and imports are doing well, when fiscal deficits are on a path to correction and when india has mountains of foreign exchange reserves. Chinas progress towards capital account convertibility.
Capital account convertibility is in vogue in terms of freedom to take out proceeds relating to fdi, portfolio investment for overseas investors and nris besides leeway for firms to invest abroad in jvs or acquisition of assets, and for residents and mutual funds to invest abroad in stocks and bonds with some restrictions. It refers to the removal of restraints on international flows on a countrys capital account, enabling full currency convertibility and the opening of the financial system. Capital account convertibility and risk management in india. Monetary policy, imbalances, and the global reserve currency system andrew k p leung, sbs, frsa a free powerpoint ppt presentation displayed as a flash slide show on. The main argument in support of the new viewthat full capital account convertibility need not be an eventual goalis that controls prevented emerging. However, the agenda of capital account convertibility was put on hold following the southeast asian crisis.
Kwohting li professor of economic development department of economics stanford university stanford, ca 943056072, u. Convertibility of capital account the complete elimination of all capital controls was often treated in the 1990s as an integral element of the market liberalization that was being urged. The setting up of a sixmember panel headed by former rbi deputy governor ss tarapore, to draw up the road map to capital account convertibility cac has brought the issue once agian to the front. Capital account convertibility linkedin slideshare. Ppt macroeconomic policy challenges for india powerpoint. Capital account convertibility capital account reserve. Capital account management international monetary fund.
A currency is said to be fully convertible, if it can be converted into some other currency at the market price of that currency. Unlike current account convertibility, capital account convertibility does not come without a downside. However, fuller convertibility has been in force since 199394 with respect to the current account, currency on account of the capital account is. What is capital account convertibility and how it affects. We have no evidence that it will solve any of our problems, and some reason to think that it may make them worse. Compared to current account convertibility, capital account convertibility is a complex issue because of the peculiar feature of capital account transactions.
Capital account convertibility and current account. Advantage, benefits and preconditions for capital account convertibility. Discuss capital account convertibility ppt within the financial management fm forums, part of the resolve your query get help and discuss projects category. Capital account refers to transactions on the balance of payments of the nation. Call on capital account convertibility depends on economic scene 12 may, 2015, 12. Indian perspective on capital account convertibility. Whats capital account convertibility the financial express. The third huang lian memorial lecture center for research on economic development and policy reform. In other words, if indians are allowed to buy only foreign goods and services but restrictions remain on the purchase of assets abroad, it is only current account convertibility. The term capital account convertibility was coined by rbi and this term is almost synonymous with the rbi committee headed by ss tarapore capital account convertibility cac means the freedom to convert local financial assets into foreign financial assets and vice versa at market determined rates of exchange. Is india ready for full capital account convertibility.
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