Convertibility of rupee pdf

Pound Sterling, U. Dollar etc received for export of merchandise and services can be freely converted into Indian rupees and vice-versa in case of imports. In the seventies and eighties many countries switched over to the free convertibility of their currencies into foreign exchange. By , 70 countries of the world had introduced currency convertibility on current account and another 10 countries joined them in In this scheme, 60 per cent of all receipts on current account i.

These 40 per cent exchange receipts on current account was meant for meeting Government needs for foreign exchange and for financing imports of essential commodities.

Thus, partial convertibility of rupee on current account meant a dual exchange rate system. Further, full convertibility of rupees at that stage was considered to be risky in view of large deficit in balance of payments on current account. As even after partial convertibility of rupee foreign exchange value of rupee remained stable, this laid down a base for the full convertibility on current account.

Hence, from March , rupee was made convertible for all trade in merchandise. However, on capital account rupee remained non-convertible. Advantages of Currency Convertibility 1.

Encouragement to exports: Market rate remains generally higher than the officially determined exchange rate. This implies that from given exports, exporter can get more rupee against foreign exchange. This will help to increase exports 2. Encourages import substitution: Imports become expensive due to convertibility of rupee.

So it discourages imports and boosts import substitution. Incentive to remittances from abroad: Earlier, NRIs used to send money illegally to India such as Hawala money and gold etc. But due to removal of restrictions, NRIs can easily remit money to India. It will help to improve Balance of payment.

Reduction in Malpractices: The malpractices like under-invoicing of exports may not arise as rupee is fully convertible and they will get full value for their exports 5. A self — balancing mechanism: Another important merit of currency convertibility lies in its self-balancing mechanism.

When balance of payments is in deficit due to over-valued exchange rate, under currency convertibility, the currency of the country depreciates which gives boost to exports by lowering their prices on the one hand and discourages imports by raising their prices on the other.

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. Capital Account Convertibility of Rupee: Capital Account Convertibility CAC is the freedom to convert local financial assets into foreign financial assets at market determined exchange rates.

India, at present has partial capital account convertibility. In India there are conflicting views regarding whether to move towards full convertibility of capital account or not. Advantages of capital account convertibility 1 Unrestricted mobility of Capital: 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.

It allows the foreign investors to easily move in and move out from an economy. This enables the domestic companies to raise funds from abroad. But during the adverse times the reverse scenario may happen. For example when the federal reserve Bank of America gave a sign that they are going increase the interest rates the foreign Institutional investors who invested their dollars in Indian stock market had withdrawn their investment from India which adversely impacted the rupee value.

Tarapore to "lay the road map" to capital account convertibility. The three crucial preconditions were fiscal consolidation a mandated inflation target and strengthening of the financial system.

The five-member committee has recommended a three-year time frame for complete convertibility by At the same time, average effective CRR needs to be brought down from the current 9.

Plus, a minimum net foreign asset to currency ratio of 40 per cent should be prescribed by law in the RBI Act. Apart from these essential pre-conditions, the Tarapore Committee also recommended that: a RBI should have a monitoring exchange rate band of 5 per cent around Real Effective Exchange Rate REER and should intervene only when the RER is outside the band: 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.

The committee was established by RBI in consultation with the Government to revisit the subject of fuller capital account convertibility in the context of the progress in economic reforms, the stability of the external and financial sectors, accelerated growth and global integration.

The report of this committee was made public by RBI on 1st September had drawn up a roadmap for as the target date for fuller capital convertibility of rupee 8. In this report, the committee suggested 3 phases of adopting the full convertibility of rupee in capital account.

First Phase in Second phase in Third Phase by The fuller capital convertibility of rupee seemed to be desirable at the end of when the committee submitted its report. However, economic events, especially global financial crisis of , brought about a sea change in the economic situation. Making the rupee fully convertible is an expected step in that direction. How soon India can do this depends on many conditions being met including low levels of non-performing assets NPA , fiscal consolidation, optimum levels of forex reserves, control on inflation , manageable current account deficit CAD , robust infrastructure for regulating financial markets, and efficient monitoring of financial organizations and businesses.

Despite economic progress being made by India on many fronts, there have been regular challenges at both the global and local levels including the global financial crisis of , a lack of inflation control, and rising NPAs—all of which have delayed full convertibility of the rupee. Reserve Bank of India. Indian Institute of Management Bangalore. Accessed April 24, International Trade Administration. Pound Sterling Live. National Bureau of Economic Research. PRS Legislative Research.

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Personal Finance. Your Practice. Popular Courses. Key Takeaways Convertibility is the ease with which a country's currency can be converted into gold or another currency through global exchanges. India's rupee is a partially convertible currency—rupees can be exchanged at market rates in certain cases, but approval is required for larger amounts.

Making the rupee a fully convertible currency would mean increased liquidity in financial markets, improved employment and business opportunities, and easy access to capital. Some of the disadvantages include higher volatility, an increased burden of foreign debt, and an effect on the balance of trade and exports. Article Sources. Investopedia requires writers to use primary sources to support their work.

These include white papers, government data, original reporting, and interviews with industry experts. We also reference original research from other reputable publishers where appropriate. You can learn more about the standards we follow in producing accurate, unbiased content in our editorial policy.

Compare Accounts. Because the value of currencies is established in comparison to each other, rather than measured against a rea commodity like gold or silver, the ready trade of currencies can offer investors an opportunity for profit. In case of two convertible currencies, Forward Exchange Rates reflect interest rate differentials between these two currencies. Thus, we can say that the Forward Exchange Rate for the higher interest rate currency would depreciate so as to neutralize the interest rate difference.

However, sometimes there can be opportunities when forward rates do not fully neutralize interest rate differentials. In such situations forward exchange rates quickly adjust to eliminate the possibility of risk-less profits. Fully convertible currency The U. There are no restrictions or limitations on the amount of dollars that can be traded on the international market, and the U.

Government does not artificially impose a fixed value or minimum value on the dollar in international trade. Foreign exchange transactions are broadly classified into two types: current account transactions and capital account transactions. Transactions on the current account are fully convertible and foreign exchange was made freely available for such transactions.

But capital account transactions are not fully convertible. The rationale behind this is clear, that India wants to conserve precious foreign exchange and protect the rupee from volatile fluctuations.

Capital account convertibility is likely to bring depth and large volumes in long-term INR currency swap markets. Sneha Patil Jun. Total views. You just clipped your first slide! Clipping is a handy way to collect important slides you want to go back to later. Now customize the name of a clipboard to store your clips. Visibility Others can see my Clipboard. Cancel Save.