What is meant by Capital account convertibility? How does it influence the growth of the economy in the country? Explain (200 Words)
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IAS Parliament 3 years
KEY POINTS
The RBI Governor recently said that India will continue to approach capital account convertibility as a process rather than an event. Capital account transactions in the rupee are already convertible to a great extent.
What is it?
· 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.
· Similarly, capital account convertibility means the freedom to conduct investment transactions without any constraints.
· Similarly, there should be no restraints on your NRI cousin bringing in any amount of dollars or dirhams to acquire an asset in India.
Why is it important?
· Developing are usually cautious in opening up their capital account. This is because inflows and outflows of the foreign and domestic capital, which are prone to volatility, can lead to excessive appreciation/depreciation of their currency and impact the monetary and financial stability.
· India’s prudence in opening up its capital account was lauded after the currency crisis in East Asian countries in 1997 exposed the problems arising from the potent combination of high current account imbalances, dependence on short-term capital flows and the whimsical nature of these flows.
· The SS Tarapore committee’s report on fuller capital account convertibility released in 2006 argued that even countries that had apparently comfortable fiscal positions have experienced currency crises and rapid deterioration of the exchange rate, when the tide turns.
· The report further points that most currency crises arise out of prolonged overvaluation in exchange rates leading to unsustainable current account deficits.
· An excessive appreciation of the exchange rate causes exporting industries to become unviable, and imports to become much more competitive, causing the current account deficit to worsen. Thus, it suggests transparent fiscal consolidation is necessary to reduce the chances of a currency crisis.
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IAS Parliament 3 years
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aswin 3 years
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