The debate on capital account convertibility

Ira Dugal is assistant managing editor, Mint.

Is india ready for full capital account convertibility

So, is India ready for full capital account convertibility? Full convertibility will open the doors of many big international players to invest in these sectors, enabling much-needed reforms and bringing variety to the Indian masses. Government officials, economists and investors all weigh in on the pros and cons of convertibility until the regulator douses the debate by saying that while India will eventually move towards fuller convertibility, the timing is not right. Making the rupee fully convertible is an expected step in that direction. Onshore rupee market development. Later, in , the then Prime Minister, Manmohan Singh, talked about the need for revisiting the subject. In the beginning of reforms, the rupee was made partially convertible for goods, services, and merchandise only. A nation's economy may be related to whether its currency is convertible. Similarly, India runs a fiscal deficit without any discipline. It indicates the extent to which the regulations allow inflow and outflow of capital to and from the country. Imagine an Indian business taking a U.

Making the rupee a fully convertible currency would mean increased liquidity in financial markets, improved employment and business opportunities, and easy access to capital among others. India is expected to become a truly global economy in the near future, and it will need fuller integration into the global economic system.

This new government's Make in India initiatives, coupled with relaxation of FDI norms, will help, but dividends from these initiatives will flow over a long period of time.

Why capital account convertibility in india is premature

The fear was that a sudden outflow of funds from this market due to global reasons could lead to an unwarranted spike in corporate funding costs. While these easily provide India an import cover of months, the rising external debt is a worrying signal. Chidambaram, set in motion the move towards full capital account convertibility by mentioning it in his Budget. Compare Investment Accounts. Rajan, though known for conservatism, said he hoped India would get to full capital account convertibility in a short number of years. There are sectoral limits in place, restrictions on the cost at which such debt can be raised and what it can be used for. Last but not the least is the banking system. Anyone who thinks that these comments suggest an imminent move towards further opening up of the capital account, would do well to look at the evidence to the contrary. It may take another three to five years for India to fully prepare itself for full rupee convertibility. Making the rupee fully convertible is an expected step in that direction. Similarly, asset quality is deteriorating fast, restricting their ability to write new business. During the mids, the rupee was made fully convertible for current account for all trading activities, remittances, and indivisibles. He particularly detailed his criticism of the possibility of the adoption of capital controls in Brazil, which could worsen the imbalances in the exchange rate market with negative effects on the macroeconomic management and the economic growth of the Brazilian economy.

There are numerous restrictions on foreigners who want to invest in India, especially in debt, or in industries by way of FDI or buying real estate. A nation's economy may be related to whether its currency is convertible.

A rising, unregulated rupee makes Indian exports less competitive in the international markets. Advantages Here are some of the benefits of making the INR into a fully convertible currency: Sign of stable and mature markets.

Current account convertibility upsc

Compare Investment Accounts. Making the rupee fully convertible would enable greater trades and global flow of Indian currency, helping national markets with improved liquidity, better regulatory purview, and reduced dependence and risks from offshore market participants. Anyone who thinks that these comments suggest an imminent move towards further opening up of the capital account, would do well to look at the evidence to the contrary. Is that the direction that India will eventually move in? Imagine having full capital account convertibility with resident Indians free to import as much gold as they want to. Opening up to a fully convertible currency is a solid sign that a country and its markets are stable and mature enough to handle free and unrestricted movement of the capital, which attracts investments making the economy better. After full convertibility, there will be no limits on the amounts exchanged and no need for approvals. I really don't see the right economic conditions for that. Full convertibility will open the doors of many big international players to invest in these sectors, enabling much-needed reforms and bringing variety to the Indian masses. In , Arida produced another paper, although it was not published in any journal, where he added other arguments to support the implementation of his purpose. The State of Indian Currency Until the early s 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. Free and open entry to an enormous number of global market participants would increase the risk of losing regulatory control due to large market size and huge flow of capital. At present, India has current account convertibility. In , the then Finance Minister, P.

However, if the U. A higher current account deficit indicates vulnerable position of the domestic currency, while the fiscal deficit has implications for inflation as well as interest rates.

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Conditions not right for capital account convertibility