The document discusses capital account convertibility (CAC), which refers to the freedom to convert local financial assets into foreign assets and vice versa at market rates. CAC has both advantages like unrestricted capital mobility and improved access to global markets, as well as disadvantages like increased volatility and easier access to illegal funds. For a country to successfully implement CAC, it needs strong macroeconomic fundamentals like economic stability, adequate foreign reserves, and good investment policies to avoid risks like capital flight negatively impacting the balance of payments.

1. Capital Account
Convertibility(CAC)

2. • Capital account refers to transactions on the balance of
payments of the nation.
• Balance of payments has broadly two categories of entries viz.,
- Current account
- Capital account

3. Definition
The RBI defined Capital Account Convertibility (CAC) as the freedom
to convert local financial assets into foreign financial assets and vice
versa at market determined rates of exchange.
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.

4. Advantages
• Unrestricted mobility of capital.
• Ability to invest abroad in easily.
• Improved access to global financial market.

5. Disadvantages
• Easier access to hawala money.
• High volatility of market.
• Leads to inflation in the domestic economy.

6. Problems
• CAC can lead to export of domestic savings.
• Flight of capital would also cause serious balance of payments
problems which can lead to increase in foreign debt.
• Reduces monetary, exchange rate autonomy for a nation.

7. Prerequisites for the successful
functioning of CAC
• Maintenance of domestic economic stability.
• Adequate foreign exchange reserve.
• Restriction on foreign exchange position is not very
comfortable.
• An appropriate industrial policy and a conducive investment
climate.
• Strong macroeconomic fundamentals are essential for success of
CAC

8. Thank you