Capital account convertibility

1. Capital Account Convertibility

2. The freedom to convert the local financial
assets into foreign financial assets and vice-
versa at market determined rate of exchange.
Or
Free and an unrestricted mobility of capital
in the country.

3. India presently has current account convertibility,
which means that foreign exchange is easily available
for import and export for goods and services.
If an Indian citizen needs foreign exchange of
smaller amounts, $ 3000/- for travelling abroad or
for educational purposes one can obtain the same
amount from a bank or a money changer. This is
current account transaction.

4. India also has partial capital account convertibility;
such that an Indian individual or an institution can
invest in foreign assets upto $25000.
Foreigners can also invest along the same lines. At
present, there are limits on investment by foreign
financial investors and also caps on FDI ceiling in
most sectors, for example, 74% in banking and
communication, 49% in insurance, 74% in
telecommunication etc.

5. If someone wants to import plant and machinery or
invest abroad and needs a large amount of foreign
exchange, $1 million, the importer will have to first
obtain the permission of the RBI.
If it is approved, this becomes a “Capital account
transaction”.
It reflects that still there is no full Capital Account
Convertibility.

6. Limitation
Capital Flight : Capital Account convertibility can
lead to “ the export of domestic savings”. It would
curb domestic investment in capital scarce develo-
ping country and it can actually destabilize the
economy through massive capital flight from a
country.

7. Full Capital Account Convertibility exposes an
economy to extreme volatility on account of “Hot
Money” money flows.
When International finance capital shifts from
country to country in search of higher speculative
returns that is known as “ hot money”, which leads
economic crisis in developing countries. (if this
capital is invested in long term investment.)