Capital Account Convertibility

Topics: Foreign exchange market, Financial market, Monetary policy Pages: 25 (7804 words) Published: December 16, 2012
Prepared ByApoorva Soni – 11020241071Pankaj Baid – 11020241021Rashmi Sonare – 11020241123Swapnil Rathi - 11020241134|





Committee’s Approach to FCAC and Related Issues 10

Interaction of Monetory Policy and Exchange Rate Policy 11

Development of Financial Markets14

Regulatory and Supervisory Issues in Banking 21

Timing and sequencing of measures for Fuller Capital Account Convertibility 25

The Committee on Capital Account Convertibility (CAC) or Tarapore Committee was constituted by the Reserve Bank of India, under the Chairmanship of Dr. S. S. Tarapore, for suggesting a roadmap on full convertibility of rupee on Capital Account. The committee submitted its report in May 1997 on account of no clear definition of CAC.


Currency convertibility refers to the freedom to convert the domestic currency into other internationally accepted currencies and vice versa. While current account convertibility refers to freedom in respect of ‘payments and transfers for current international transactions’, capital account convertibility (CAC) would mean freedom of currency conversion in relation to capital transactions in terms of inflows and outflows. Article VIII of the International Monetary Fund (IMF) puts an obligation on a member to avoid imposing restrictions on the making of payments and transfers for current international transactions. The path to fuller capital account convertibility (FCAC) is becoming unidirectional towards greater capital account convertibility. For the purpose of this Committee, the working definition of CAC would be as follows:

“CAC refers to the freedom to convert local financial assets into foreign financial assets and vice versa. It is associated with changes of ownership in foreign/domestic financial assets and liabilities and embodies the creation and liquidation of claims on, or by, the rest of the world. CAC can be, and is, coexistent with restrictions other than on external payments.”

Impact of the changing International and Emerging Market Perspectives

The perspective on CAC has, however, undergone some change following the experiences of emerging market economies (EMEs) in Asia and Latin America which went through currency and banking crises in the 1990s. A few countries backtracked and re-imposed some capital controls as part of crisis resolution. While there are economic, social and human costs of crisis, it has also been argued that extensive presence of capital controls, when an economy opens up the current account, creates distortions, making them either ineffective or unsustainable. The costs and benefits or risks and gains from capital account liberalisation or controls are still being debated among both academics and policy makers. These developments have led to considerable caution being exercised by EMEs in opening up the capital account. Significance of Capital Account Convertibility (CAC) in Indian Context

The 1997 Committee recommended a set of measures and their phasing and sequencing. India has cautiously opened up its capital account since the early 1990s and the state of capital controls in India today can be considered as the most liberalised it has ever been in its history since the late 1950s. Nevertheless, several capital controls continue to persist. In this context, FCAC would signify the additional measures which could be taken in furtherance of CAC and in that sense; ‘Fuller Capital Account Convertibility’ would not necessarily mean zero capital regulation.


* The position in relation to the capital account in India in 1997 was that of an economy which had taken the early steps in capital account...
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