this presentation describes how the capital account convertibility is in India. What is Capital account? What is Capital account convertibility? Measures. Advantages and Disadvantages

1. By-AYUSH GUPTA
MBA-IB
University Business School
Chandigarh

2.  What is Capital Account ?
 What is Capital Account Convertibility ?
 Measures
 Advantages and Disadvantages.
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3. Capital Account
 It reflects change in ownership of nation’s assets
 Foreign Investment in India(FDI, FII, ADR, direct
purchase of land ,assets etc.)
 External Commercial Borrowing , External assistance
etc
 Capital account= Change in foreign ownership of
domestic assets – Change in domestic ownership of
foreign assets
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4. Capital Account Convertibility
 Floating Exchange Rate
 What it means ? – Freedom of Conversion
 CAC allows anyone to freely move from local currency
into foreign currency and back.
 Changes of ownership in foreign/domestic financial
assets and liabilities.
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5. Tarapore Committee
 Formed in 1997
 Chairman- Former Deputy Governor of RBI
S.S Tarapore
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6. TARAPORE COMMITTEE
 Preconditions
- Gross fiscal deficit to GDP ratio to come down from a 4.5 %n
1997-98 to 3.5% in 1999-00.
- A consolidated sinking fund has to be set up to meet government's
debt repayment needs; financed by RBI.
- Inflation rate to be at 3-5 per cent for the 3-year period 1997-
2000 .
- Gross NPAs of the public sector banking system needs to be
brought down.
-Average effective CRR needs to be brought down from the current
9.3% to 3% .
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7. A.G

8.  18th march 2006
 “Given the changes that have taken
place during the last two decades
there is a merit in moving towards
fuller capital account
convertibility with a transparent
framework…..I will therefore
request the Finance Minister and
RBI to revisit the subject and come
out with a format based on current
realities.”
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9. Second Tarapore Committee on
Fuller Capital Account
Convertibility
 S.S Tarapore again as chairman
 Submitted its report on September 2006.
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10. Roadmap For FCAC
 Phase I : 2006-07 involves move from current capital
movement of individuals from $25000 to $50000.
 Phase II : 2007-09 Further raised to $100000
 Phase III : 2009-11 Raised to a maximum of $200000
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11.  In case of corporate the remittance would rise from
200 percent to 400 percent
 In case of banks overseas borrowings are made more
liberal
 In case of mutual funds overall ceilings should be
moved from $2 billion to $5 billion.
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12. Advantages
 Diversification
 Foreigners Investment
 Catalyst for financial market, institutional
development, competition, technologies and
discipline macro economic policies
 Reduction in size of black money
 Induces competition against Indian finance.

13.  CAC also allows the people and companies
not only to convert one currency to another,
but also free cross-border movement of those
currencies, without the interventions of the
law of the country concerned.
 Thus, Indians could convert their rupees into
dollars and park it in the US if there was
capital account convertibility here.
 Imagine if a large number of Indians were to
do this out of an irrational fear that India
might go to war with Pakistan!
However, a word
of warning…
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15. East Asian Crisis
 THAILAND
 During 1985-96 was growing at highest rate of 9%
 Real estate sector was booming
 High interest rate
 Export growth was very high
 Thailand Baht was pegged at 25 to US $.
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16. Reason for Failure
 US had increased interest rate to curb inflation this made
US investors to take their money from Thailand and invest
in US.
 Citizens of Thailand also lost confidence in Thailand Baht.
 It reached its lowest point of 56 units per $.
 This made foreign loan costlier
 Biggest corporation “Finance One” collapsed.
 Fear among foreign investors.
 Leads to political instability and people loosing their jobs.