Why some currencies are convertible and others are not

convertible?
"Freely convertible currencies have immediate value on the foreign
exchange market, and few restrictions on the manner and amount that
can be traded for another currency. Free convertibility is a major feature
of a hard currency. Some countries pass laws restricting the legal
exchange rates of their currencies or requiring permits to exchange
more than a certain amount. Some currencies, such as the North
Korean won, the Transnistrian ruble, and the Cuban national peso, are
officially nonconvertible and can only be exchanged on the black
market. If an official exchange rate is set, its value on the black market is
often lower. Convertibility controls may be introduced as part of an
overall monetary policy. For example, restrictions on the Argentine peso
were introduced during an economic crisis in the 1990s and scrapped in
2002 during a subsequent crisis.”

The Indian rupee

The Indian rupee is officially a free-floating currency although the
Reserve Bank of India controls the exchange rate through open market
operations; -buying and selling currencies in the FX markets-, and
through regulations of capital flows in and out of the country. Properly
speaking, we could consider the rupee as a managed floating currency.
Until 1991, the rupee was pegged to a basket of the currencies of India
´s major trading partners. However, the trade balance deficits coming
from 1985 had dried up the FX reserves and set the country at the brink
of default. Pressured by high inflation and large budget deficits, the
Government was forced to devaluate the currency.
In 1994 the rupee was made freely convertible for trading, but not for
investment purposes. By the year 2000, the rupee had gone through a
strong devaluation.
From 2000 to 2007, the rupee started a stabilization and recovery
period. The improvement of Indian economy attracted foreign
investment into the country and the value of the rupee started to
increase. This appreciation posed a dilemma for policymakers as a
strong rupee would increase the prices of Indian products in overseas
markets, thus hampering exports.
In 2008, the outbreak of the financial crisis froze the capital inflows, and
triggered massive repatriations by foreign investors. The rupee
depreciated almost 40% over the next 12 months.
In 2013, the rupee devaluated again. Stagnant reforms in India and the
announcement of U.S. Fed president Ben Bernanke about the plans to
unwind the QE prompted foreign institutional investors to pull their cash
from India, attracted by higher revenues in the U.S. The RBI’s attempts
to stem the depreciation did not avoid a vicious circle of weaker rupee –
higher deficit –  weaker equity markets – more cash outflows, and the
rupee depreciated another 30%.
In 2015 and 2016, the rupee has been going through a steady declining
trend, as the dollar appreciated in parallel with U.S. economic recovery.
In the first half of 2017, however, INR has appreciated, as the dollar
weakened with the U.S. economy giving signs of deceleration and
growing political uncertainty.
Rupee restrictions
In order to maintain a certain stability in the exchange rate of the rupee,
the Reserve Bank of India exerts a series of restrictions on rupee trading
in foreign exchange markets:
• Rupee speculation is not permitted.
• In and out flows of foreign exchange funds are regulated by the
RBI guidelines.
• Rupee payments to bank accounts outside of India are not
permitted.
• There is not straight-through-processing (STP) in Indian banks for
payments sent from overseas banks.
• Payments related to Foreign Direct Investment are only permitted
for certain sectors and subject to compliance rules buy the RBI.

Conclusions
 Despite the spectacular development of Indian economy, the Indian
rupee is still far from being a convertible currency, and therefore its use
in the international trade is limited.
The rupee is very sensitive to the flows of foreign investment in India.
Capital outflows in times of global economic contraction tend to have a
deep impact on the exchange rate, with potentially disastrous
consequences for the economy. To avoid that, the RBI exerts
restrictions on rupee trading.
To avoid returned payments and delays, most of the companies working
with India tend to pay their suppliers in euro or dollar, which often
involves a markup on the prices set by their Indian partners to cover
themselves from exchange rate volatility.
From now on, you will be able to pay in Indian rupee with Kantox.
Simpler processing and the best international payments infrastructure to
guarantee success.

What would make a country’s currency fully convertible?

A currency is fully convertible, when there are no current account or
capital account restrictions for free movement of funds into the country
and out of the country. As there are lot of restrictions for free movement
of funds from India and also into the country, Indian Rupee is not fully
convertible.

India is still a developing economy and has lot of inherent weaknesses.

We don't have surplus current account, meaning our exports and
services earnings and other invisible exports are far less than imports.
This always leads to pressure on Indian Rupee.

Ours is relatively closed economy, in the sense INR is not fully

convertible. Typically when countries have opened their capital account,
except a few occasions, countries have suffered financially. It may slow
you down in good times, but it can be a protection during bad times.

But does not mean, you can be a partially closed economy always. You
need to strengthen in all fronts and then open the economy towards
taking the Indian Rupee fully convertible.

Rupee is partially convertible into foreign currency as capital account

convertibility has not been permitted till date by the monetary authority
i.e. RBI.

Full convertibility in current account is accepted and for export and

import purposes rupee is fully convertible.

However when people come and go out of the country restrictions are
there for repatriation of their property as capital account convertibility
has not been made.

HOW IT WORKS IN INDIA?

Capital and current account convertibility in pretext to Indian economy.

The Committee, chaired by former RBI governor S S Tara pore, was set
up by the Reserve Bank of India in consultation with the Government of
India 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.
Reserve Bank of India, and will have the following terms of reference:

Undertake a review of the extant regulations that straddle current and

capital accounts, especially items in one account that have implication
for the other account, and iron out inconsistencies in such regulations.

Examine existing repatriation/surrender requirements in the context of

current account convertibility and management of capital account.
Identify areas where streamlining and simplification of procedure is
possible and remove the operational impediments, especially in respect
of the ease with which transactions at the level of authorized entities are
conducted, so as to make liberalization more meaningful.
Currency Convertibility.

Ensure that guidelines and regulations are consistent with regulatory

intent.

Review the delegation of powers on foreign exchange regulations

betweenCentral Office and Regional offices of the RBI and examine,
selectively, theefficacy in the functioning of the delegation of powers by
RBI to AuthorizedDealers (banks).

Rupee Convertibility:

Convertibility of a currency implies that a currency can be transferred

into anothercurrency without any limitations or any control. A currency is
said to be fullyconvertible, if it can be converted into some other
currency at the market price ofthat currency. Convertibility can be
related as the extent to which a country’sregulations allow free flow of
money into and outside the country.

For instance, in the case of India till 1990, one had to get permission
from theGovernment or RBI as the case may be to procure foreign
currency, say US Dollars,for any purpose. Be it import of raw material,
travel abroad, procuring books orpaying fees for a ward who pursues
higher studies abroad. Similarly, any exporterwho exports goods or
services and brings foreign currency into the country has tosurrender the
foreign exchange to RBI and get it converted at a rate pre-determinedby
RBI.

At present, Indian rupee is partly convertible on current Account. That

isconvertibility in the case of transactions relating to exchange of goods
and services,money transfer.

In 1997, the Tara pore committee on capital Account convertibility was

constitutedby the Reserve Bank. This committee indicated three
preconditions for capitalAccount convertibility, they are Fiscal
consolidation, a mandated inflation target,strengthening of the financial
system.
During March 2006, Prime Minister said that India is moving towards
fuller capitalaccount convertibility. In response to this the Reserve Bank
of India set up the Tarapore Committee to work out another roadmap for
current account convertibility.

Full currency convertibility of the Indian rupee means, can travel abroad
and buydollars over the counters, currency convertibility refers to the
absence of anyrestriction on the holding of foreign currency by residents
and of the nationalcurrency by foreigners, and on free conversion
between currencies. Can incurexpenses abroad using the credit card
and pay for the dollars (or pounds, or euro‟s)expanded in rupees.

This helps to invest in specified foreign shares and mutual funds. And
also it attractsmany foreign tourists, which can be contributed to the
GDP.

Therefore, fuller convertibility of Indian rupee helps to attract FDI and

also helpsIndians to invest abroad.

After the economic liberalization process started in India in 1991, a

LiberalisedExchange Rate Mechanism was introduced in 1992.This
allowed partialconvertibility of Indian rupee, thus introducing dual
exchange rate. After that fullconvertibility on trade account started from
1993.It was followed by Fullconvertibility on current account from 1994.

However after the Mexico crisis in early1990s or the mammoth East

Asia Crisis where there was sudden flow of capitalinternationally
debilitating the economies of the involved nations, India wasreluctant to
adopt capital account convertibility.However the Tara pore committee,
appointed in 1997, recommended phasedimplementation of capital
account convertibility with certain prerequisites like fiscaldeficit to be
3.5% of GDP,CRR to be brought down to 3%, gross NPA of publicsector
banks to be 5% of the total assets, inflation rate to be around
3.5%.Thecommittee was reappointed almost a decade later and
submitted almost the samerecommendations with some modifications.

It must be remembered that the movement towards fuller CAC should be

a processand not an event. Macroeconomic stability is a must before
achieving full CAC. Anyadhoc arrangement from the fixed regime
maintained for a long period of time mightdisturb the foreign exchange
market and disrupt the economic progress.
At present, Indian rupee is partly convertible on current Account. That
isconvertibility in the case of transactions relating to exchange of goods
and services,money transfer.

Convertibility of rupees is known as freedom of exchange of rupee with

other allinternational currency. It means that rupee can covert in USA
dollars more easilyand USA dollars can convert in Indian currency for
buying and selling of goods andservices. after study everything, I am
writing, "it is conspiracy to lower the value ofIndian currency that in real
sense. In 1996, there were just Rs. 38 for every onedollar but after
liberalized convertibility of rupee, one dollar exchange rate hasreached
up to Rs. 45 in 17th Jan. 2011. When convertibility of Rupee was
started, itwas claimed that our export will increase because our Indian
companies will easy totrade in foreign country due to easy exchange
without any govt. restriction. But, itopens doors for importing useless
things and moreover it is very sad for India thatgold is not make as
standard exchange currency. China is smart than India, underhis new
foreign exchange policy, convert all his foreign exchange in gold. Now,
hisChinese yuan is equal to Indian Rs. 6.89.

RUPEE AS A CONVERTIBLE CURRENCY:

The recent decision of the government to have full convertibility of the

Indian Rupeewhich will affect everyone in the country but is remotely
understandable by a few, isone such important decision, which is
designed to please the international financialinstitutions and the 10
percent of the population of India who are either rich or ofupper middle
class.
It is essential to judge a policy by examining both the costs and benefits
of it. Thegovernment is talking about the illusory benefits of this
convertibility, which willbasically remove all obstacle to the free flow of
money and as a result goods andservices also can move freely.

The government, in a fully convertible regime, will not be able to control

these flowsdirectly. Indirect controls will be implemented by changing
interest rates and taxesbut the effectiveness of this control according to
the international experiences isuncertain. Page 22