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Please note that the concept of Capital Account Convertibility was coined by RBI and CAC is now almost synonymous with the SS Tarapore Committee. Capital account is made up of both the short-term and long-term capital transactions such as investments in financial and non-financial assets. Currency convertibility is a multifaceted concept that plays a significant role in shaping a country’s economic landscape. Its implications are far-reaching, affecting everything from individual purchasing power to national economic policies. As the world becomes increasingly interconnected, the importance of understanding and managing currency convertibility continues to grow. In view of the risks involved in the fuller convertibility of the Rupee, the Committee emphasized upon the phased programme of relaxing the capital controls.

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In the countries studied by the Committee, there was the removal of restrictions on inflows and related outflows by the non-residents and residents. The cautious approach in respect of full convertibility of rupee was fully justified in view of the Mexican crisis and subsequent East Asian crisis. The full convertibility of rupee required the capital account convertibility of rupee along with the current account convertibility. 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 arty other currency without any transaction.

Policymakers, on the other hand, face the challenge of adapting regulatory frameworks to accommodate digital currencies while safeguarding the financial system. The question of how to treat digital currencies for tax purposes, how to prevent their use for illicit activities, and how to protect consumers in the digital currency space are all pressing concerns that require careful consideration. (xv) There should be the development of gold market with participations of banks, and financial institutions, gold denominated deposits and loans, and gold derivatives. (v) Removal of maturity restrictions on FII investments in debt instruments and investment in rupee debt securities to be subjected to a separate ceiling and not ECB ceiling. (vii) The fully convertible currency can result in automatic self-balancing of total foreign receipts and payments.

This ease of conversion also applies to investors who may seek to place their funds in foreign markets. They can invest with the confidence that they can convert their returns into their home currency without significant loss. The Tarapore Committee’s recommendations (in 1997 and 2006), including reducing fiscal deficits, inflation rates, and banking non-performing assets, should be pursued as a primary step towards internationalisation of rupee. Also, advocating for the rupee to become an official currency in international organizations would raise its profile and acceptance. India’s currency, the rupee, is not yet a fully convertible currency, meaning there are still restrictions that make it difficult to buy or sell in the foreign exchange (forex) market. However, there have been talks of making the rupee (INR) fully convertible and setting up an onshore INR market.

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It indicates the extent to which the regulations allow inflow and outflow of capital to and from the country. (vi) In the case of resident individuals, the recommendations included the allowing of foreign currency denominated deposits, foreign capital transfer and liberalisation of repatriation norms. (viii) Full convertibility of rupee will enable the Indian investors to hold internationally convertibility of rupee implies diversified investment portfolio. (iii) In case the exportable products have high import-content, to that extent, a higher market-determined rate of exchange can reduce profitability of exports.

The correct answer is Freely permitting the conversion of the rupee to other major currencies and vice versa. (vii) Permission to individuals to invest abroad in companies, listed on overseas stock exchanges and having at least 10 percent shareholding in a company listed on a recognised stock exchange in India on January 1 of the year of investment. (vi) Permission to mutual funds to invest abroad in companies, listed on overseas stock exchanges and having at least 10 percent shareholding in a company listed on a recognised stock exchange in India on January 1 of the year of investment. The overall cap for investment abroad by mutual funds has been increased to U.S. $ 1 billion. (iii) General permission to retain ADR/GDR proceeds, abroad for future foreign exchange requirements. (ii) Discontinuation of limits on trade-related loans and advances by EEFC account holders.

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For setting put a roadmap towards fuller capital account convertibility, the Reserve Bank of India constituted a Committee headed by S.S. (d) All-India financial institutions which fulfill certain regulatory and prudential requirements would be allowed to participate in foreign exchange market along with authorized dealers (ADs) who are, at present, banks. In a later stage, certain select NBFCs would also be permitted to act as authorized dealers in foreign exchange market. By 1990, 70 countries of the world had introduced currency con­vertibility on current account, another 10 countries joined them in 1991. Capital account convertibility represents a crucial aspect of economic liberalization, facilitating increased participation in the global financial landscape and supporting both inward and outward capital flows. The careful sequencing and management of this process are vital for its successful implementation and impact on the economy.

In case of the remaining 40 percent of receipts, the rate applicable was the official rate of exchange. Under Article VIII, Sections 2, 3 and 4 of the IMF the member countries of the IMF are obliged to restore current account convertibility of their currencies. It may be noted that large depreciation or appreciation of exchange rate adversely affects the economy, especially its exports and imports. In order to prevent large appreciation and depreciation of Indian rupee, Reserve Bank of India often intervenes to ensure that exchange rate should remain within reasonable limits. The major difficulty with the Tarapore Committee recommendation was that it would like the capital account convertibility to be achieved in a 3 year period – 1998 to 2000.

1. No one could keep foreign exchange without the knowledge and due permission of RBI.
2. These currencies are usually more tightly controlled by a government’s regulatory authority or central bank.
3. But full convertibility of currency for capital account transactions is still a distant dream.
4. (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.
5. Likewise, the dividends, capital gains, interest received on purchased stock, equity etc. profits earned on direct investment get the rupees converted into US dollars, Pound Sterling’s at market determined exchange rate between these currencies and repatriate them.
6. The full convertibility means no RBI dictated rates and there is a unified market determined exchange rate regime.

Currency Convertibility and Rupee Convertibility: Key Points – UPSC Economy Notes

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. 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. Convertibility is the ease with which a country’s currency can be converted into gold or another currency through global exchanges.