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Convertibility of Rupee

This document discusses convertibility of the Indian rupee, including different types of convertibility such as current account and capital account convertibility. It provides a history of rupee convertibility in India and recommendations from the Tarapore Committee to move towards full capital account convertibility through three phases. While capital account convertibility could increase capital flows and competition, it also exposes the economy to greater instability and risk of financial bubbles. There are debates around the appropriate pace and sequencing of liberalization.

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kumar sachin deo
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1K views13 pages

Convertibility of Rupee

This document discusses convertibility of the Indian rupee, including different types of convertibility such as current account and capital account convertibility. It provides a history of rupee convertibility in India and recommendations from the Tarapore Committee to move towards full capital account convertibility through three phases. While capital account convertibility could increase capital flows and competition, it also exposes the economy to greater instability and risk of financial bubbles. There are debates around the appropriate pace and sequencing of liberalization.

Uploaded by

kumar sachin deo
Copyright
© Attribution Non-Commercial (BY-NC)
We take content rights seriously. If you suspect this is your content, claim it here.
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Download as PPTX, PDF, TXT or read online on Scribd
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CONVERTIBILITY

OF
RUPEE
TABLE OF CONTENTS

• WHAT IS CONVERTIBILITY?

• DIFFERENCE BETWEEN CAPITAL & CURRENT ACCOUNT

• RECOMMENDATIONS BY THE TARAPORE COMMITTEE

• CAC IMPLEMENTATION INDUSTRY

• ASIAN FINANCIAL CRISIS 1997

• VIEWS ON CAC

• CONCLUSION
DEFINITION
 Currency convertibility refers to the freedom to
convert the domestic currency into other
internationally accepted currencies and vice versa
at market determined rates of exchange.
TYPES OF CONVERTIBILITY
Current account convertibility-
Current account convertibility allows residents to
make and receive trade-related payments, i.e.
receive foreign currency for export of goods and
services and pay foreign currency for import of
goods and services like travels, medical treatment
and studies abroad.
Capital account convertibility-
we mean the freedom to convert the local
financial assets into foreign financial assets.
HISTORY OF RS CONVERTIBILITY
 Up to 1991, when India faced a major foreign exchange
crisis, there had been very rigid controls on both the
capital account as well as the current account.
 Current account convertibility was introduced in India in
August 1994.
 After start of liberalization in1991, India had accepted
the IMF rules for currency reforms.
 In 1997 the government had set up a
committee(Tarapore committee) to spell out a road map
for the full convertibility of the rupee.
CONT.
 Committee suggested three phases of adopting
full convertibility of rupee in capital account.

First phase in 2006 -2007


Second phase in 2007-2009
Third phase in 2009- 2011
FULL CAPITAL ACCOUNT CONVERTIBILITY(CAC)
CURRENT ISSUES

 Until the Asian crises of 1997-98, there was a


growing consensus that controls on global
financial flows were harmful and the lifting of
such controls would lead to increased flows to
emerging markets.
CONT.
Two schools of thoughts have developed in this context.

 First school of thought:


Complete lifting of controls and equal treatment of foreign
financial institutions. It argue, that liberalization enhances the
functioning of the financial services sector.
 Second school of thought :
Adopt differential treatment based on levels of development
and the adoption of a more orderly and sequenced approach to
liberalization in accordance with the levels of developments in
financial markets and supervisory system of member countries.
ADVANTAGES OF CAC
 More capital available to the country, and the cost of
capital would decline.
 The freedom to trade in financial assets.
 Difficult for a country to follow unwise
macroeconomic policies.
 Tax levels would move closer to international levels .
 It will grow competition among financial
institutions.
DISADVANTAGES OF CAC
 It could lead to the export of domestic savings.
 Expose the economy to larger macroeconomic
instability.
 Premature liberalization could initially stimulate capital
inflows that would lead to appreciation of real exchange
rate and thereby destabilize an economy undergoing the
fragile process of transition and structural reform.
 It may bring low quality investment .
 It may generate the financial bubble.
IF WE HAVE CAC ?
 We will able to freely purchase assets abroad.
 We will able to pay the price in foreign currency.
 We will able to invest money in foreign capital
market without restriction.
 We can accept foreign currency for any kind
transaction.
CONCLUSION
 The volatile nature of capital inflow presents an
alarming trend.
 Liberalizing capital control may lead to huge
dependence on foreign portfolio capital.
 Need is to channelize the capital flow.
THANK YOU
PRESENTED TO
MR. S. K VAZE

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