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Economic Environment of Business Presentation On “Should India go in for Full Capital Account Convertibility?”Presented By: 1. Lalit Ambolkar : 01 2. Shweta Bais : 03 3. Vinayan Bambardekar : 05 4. Vivek Band : 07 5. Karan Bhagatwala : 09
Capital Account Convertibility1. Capital account convertibility (CAC) or a floating exchange rate means the freedom to convert local financial assets into foreign financial assets and vice versa at market determined rates of exchange.2. This means that capital account convertibility allows anyone to freely move from local currency into foreign currency and back.
How are Capital A/c Convertibility and Current A/c Convertibility different?1. Capital Account2. Current Account3. Difference between Capital Account Convertibility and Current Account Convertibility.
Why is CAC such an Emotive Issue?1. Major comfort for overseas investors2. Going in for CAC without adequate preparation could be catastrophic3. Tarapore Committee Road Map for CAC in India
Problems with CAC1. During the good years of the economy, it might experience huge inflows of foreign capital, but during the bad times there will be an enormous outflow of capital under “herd behaviour”2. There arises the possibility of misallocation of capital inflows into low-quality domestic investments like stock markets or real estates.3. An open capital account can lead to “the export of domestic savings”4. Entry of foreign banks can create an unequal playing field, whereby foreign banks “cherry-pick” the most creditworthy borrowers and depositors.5. International finance capital today is “highly volatile”, i.e. it shifts from country to country in search of higher speculative returns.
Experience of Developing Countries with FCAC1. Under the diktat of the IMF-World Bank, several developing countries have undertaken measures to open their capital account as part of a broader process of Financial liberalization and International Economic Integration.2. Several developing countries like Argentina, Kenya, Mexico and the South East Asia (Indonesia, South Korea, Malaysia and Thailand) liberalized their capital accounts over the last few years.3. Boom in capital flows internationally followed by the reversal of such flows
The Successive Meltdowns1. The first reversal occurred in the aftermath of Mexico‟s currency crisis in December 1994.1. The second reversal, which was more severe and enduring, came in 1997 and resulted in the East Asian crisis.2. Russian default in August 1998 and the Brazilian crisis in 1998-99,3. Collapse of the Argentine currency in 2001 and the spate of corporate failures and accounting irregularities in the USA in 2002.
Rationale for Capital Account Liberalization1. Traditional Theory of International Trade2. Modern Theory of International Trade3. Integration with world markets
Current Restrictions to CAC1. Relaxation of the control by the Govt.2. RBI Limits with respect to foreign currency: 1. Private Visit - $10000 2. Business Travel - $25000 3. Gift/Donation - $5000 4. Employment/Immigration/Studies - $100000 5. Investment in Foreign Stock - $25000
Current level of freedom in CAC1. Indian residents & companies can invest in foreign companies2. No monetary limit on such investments by individuals3. Exporters can give loans to foreign importers without any limit4. Residents Foreign Currency (domestic) Accounts5. NRIs and non residents can take up to $1 million per year out of the country
What is the Tarapore Committee?1. Appointed by RBI to set out the framework for fuller CAC2. Chairman: Former RBI governor S. S. Tarapore3. Recommended setting up of a Task Force
Glimpse of the currentFinancial State of India
Why India Needs FCAC1. Total financial mobility2. Efficient appropriation of international capital3. Forecasts by Tarapore Committee 1. Avg. inflation rate of 3-5% 2. NPA will decline 3. Complete deregulation of structure of rate of interest 4. Gross fiscal deficit will fall
Is India ready for Full CAC?1. India has Current account convertibility and „Partial CAC‟2. Present condition v/s Tarapore committee‟s forecast3. Increasing the investments 1. Short term 2. Long term4. Diversification of portfolio
Existing Challenges to FCAC1. Limited competency of banks to manage Risks.2. Non-availability of Derivatives instruments.3. Ever existing Market Risk.
Recommendations1. Appropriate Infrastructure.2. Banks must monitor their liquidity position.3. Ability to hedge risks through derivatives and insurance.
Conclusion1. CAC is concerned about the ownership changes in domestic or foreign financial assets and liabilities.2. Financial capitalists, major commercial firms in India to enjoy the benefits of CAC policy.3. CAC does not serve the purpose of eradication of inequalities in Indian economy.