Context:
Arvind Panagariya, Chairman of the 16th Finance Commission, emphasized that India should not rush into full capital account convertibility at its current per capita income level.
Capital Account Convertibility:
- Means the freedom to conduct investment transactions across borders without restrictions.
- It means 2 things –
- No limits on converting rupees to foreign currency for asset acquisition.
- No limits on NRIs bringing in foreign currency to acquire assets in India.
- India’s Scenario – Partial capital account convertibility achieved.
- Advantages of Full Capital Account Convertibility –
- Attracts higher foreign investment, boosting economic and infrastructure growth.
- Greater financial integration improves India’s access to international markets.
- A more open capital account signals economic maturity and stability, improving India’s credit standing.
- Challenges –
- Fluctuations – Unregulated capital flows can cause instability in exchange rates and inflation.
- Currency Risk – Sudden inflows or outflows may lead to excessive currency appreciation or depreciation.
- External Shocks – Greater exposure to global markets increases vulnerability to financial disruptions.
Current Account Convertibility:
- Refers to the freedom to convert your rupees into other internationally accepted currencies and vice versa without any restrictions whenever you make payments.
- India allows for 100 % Current Account Convertibility.
Source: BL
Previous Year Question
Convertibility of rupee implies
[UPSC Civil Services Exam – 2015 Prelims]
(a) being able to convert rupee notes into gold
(b) allowing the value of rupee to be fixed by market forces
(c) freely permitting the conversion of rupee to other currencies and vice versa
(d) developing an international market for currencies in India
Answer: (c)
