The document discusses the convertibility of the Indian rupee. It begins by stating that the Indian rupee is a partially convertible currency, meaning exchange of higher amounts is restricted and requires approval. It then defines currency convertibility and explains that India has moved towards greater convertibility over time. Currently, the rupee has partial convertibility on the capital account. While full convertibility poses some risks, India is slowly working to meet preconditions like fiscal consolidation and resilient markets. The document outlines India's path towards convertibility since the 1990s crisis and liberalization, including the recommendations of committees to further open the capital account.

1. 2021
Convertibility
of Indian
Rupee
Classroom Deliberations
CA Dr. Prithvi Ranjan Parhi
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CA DR Prithvi Ranjan Parhi

2. 703- INTERNATIONAL TRADE AND BUSINESS
MODULE- I
International Trade: Concept, Importance, Benefits of International Trade, international
Marking vs. Domestic Marking (differences).
Theory of International Trade: theory of comparative Cost, factor proportion Theory.
MODULE-II
Multinational corporations (MNCs): Definition, Role of MNCs in International marking.
International Trade barriers: Meaning, tariff and non-Tariff Barriers, Impact of Non-tariff
barriers.
MODULE-III
Organizational and Agreements: WTO (Functions, Principle, agreements), IMF
(Purposes, Facilities Provided by IMF), World Bank (Purpose, Principle, Policies).
MODULE-IV
Foreign Trade of India: Organizational Setup (Autonomous Bodies, Attached and
subordinate offices), Major Export and Imports, Concept of Export House, EXIM Policy
(2002-2007) of India (Features and Objectives of the Policy).
MODULE-V
Foreign Exchange market: Concept, Functions, Methods of international Payment,
concept of Balance of Payment, Concept of Fixed and Flexible Exchange Rate and
Convertibility of Rupee.
CA DR Prithvi Ranjan Parhi 2

3. Is INR fully convertible?
• Indian rupee is a partially convertible currency.
• Although there is a lot of freedom to exchange
local and foreign currency at market rates, the
Indian rupee is a partially convertible currency,
meaning the exchange of higher amounts is
restricted and still needs approval.
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4. Convertibility of a currency
• Currency convertibility is the ease with which a country's
currency can be converted into gold or another currency.
Convertibility is extremely important for international
commerce.
• When a currency is inconvertible, it poses a risk and barrier to
trade with foreigners who have no need for the domestic
currency.
• Government restrictions can often result in a currency with a
low convertibility.
• For example, a government with low reserves of hard foreign
currency often restrict currency convertibility because the
government would not be in a position to intervene in the
foreign exchange market (i.e. revalue, devalue) to support their
own currency if and when necessary.
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CA DR Prithvi Ranjan Parhi

5. Convertibility of Rupee
• Currency convertibility is of two types:
1.Current Account Convertibility
2.Capital Account Convertibility
• Current account convertibility allows free inflows
and outflows for all purposes other than for capital
purposes.
• Capital purpose means dealing the investments in
foreign currency and obtaining loans in foreign
currency, acquiring any plant and machinery from
abroad by making payments in foreign exchange.
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CA DR Prithvi Ranjan Parhi

6. Convertibility of Rupee(Indian Experience)
• After the BoP crisis of 1990-91 and change in the central Government, the
Liberalised Exchange Rate Management System (LERMS) was
introduced as a first measure towards making foreign exchange a free
commodity.
• Thus, when LERMs was introduced, there were two exchange rates in India:
Official Rate for select items of exports and imports Market Rate for all
others.
• The Government said that now onwards, anyone who deals in current
account means international trade of goods and services will be able to
convert them to Indian Rupees as follows: 40 % of the receipts at Official
rate 60% of the receipts at Market Rate.
• This means that only part of the current account receipts were made
convertible at market rates and that is why it was called Partial
Convertibility of Rupee on Current Account.
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CA DR Prithvi Ranjan Parhi

7. Convertibility of Rupee(Indian Experience)
• Encouraged with the success of the LERMS, the
government introduced the full convertibility of
Rupee in Trade account (means only
merchandise trade no service trade)from March
1993 onwards.
• With this the dual exchange rate system got
automatically abolished and LERMS was now
based upon the open market exchange.
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CA DR Prithvi Ranjan Parhi

8. Convertibility of Rupee(Indian Experience)
• In August 1994, the Government of India declared full
convertibility of Rupee on Current account .(Trade and
invisibles).
• 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.
• The Committee on Capital Account Convertibility (CAC) or
Tarapore Committee was constituted by the Reserve Bank of
India for suggesting a roadmap on full convertibility of Rupee
on Capital Account.
• The committee submitted its report in May 1997.
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CA DR Prithvi Ranjan Parhi

9. Convertibility of Rupee (Indian Experience)
• However, some partial convertibility of Rupee on Capital
Account was introduced later. Today we have Partial
convertibility of Rupee on Capital Account.
• Reserve Bank of India appointed the second Tarapore
committee to set out the framework for fuller Capital
Account Convertibility.
• The report of this committee was made public by RBI on 1st
September 2006.
• In this report, the committee suggested 3 phases of adopting
the full convertibility of rupee in capital account.
– First Phase in 2006-7
– Second phase in 2007-09
– Third Phase by 2011.
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10. Convertibility of Rupee(Indian Experience)
Following were some important recommendations of this
committee:
• The ceiling for External Commercial Borrowings (ECB)
should be raised for automatic approval.
• NRI should be allowed to invest in capital markets NRI
deposits should be given tax benefits.
• Improvement of the Banking regulation.
• FII (Foreign Institutional Investors) should be prohibited
from investing fresh money raised to participatory notes.
• Existing PN holders should be given an exit route to
phase out completely the PN notes.
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11. Are We moving towards fuller capital
account convertibility?
• Though there are certain risks associated with full
capital account convertibility, we cannot avoid it for
longer period as it may become counter-productive.
• But how early are we moving to full capital account
convertibility depend on various pre-conditions like low
and sustained current account deficit, fiscal-
consolidation, controlled inflation, low level of NPAs,
resilient financial markets, prudent supervision of
financial institutions etc.
• Already India is making progress on these fronts.
• Today we have Partial convertibility of Rupee on Capital
Account and slowly moving towards fuller capital
account convertibility.
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CA DR Prithvi Ranjan Parhi

12. Advantages of Currency Convertibility:
1. Encouragement to exports: ...
2. Encouragement to import substitution: ...
3. Incentive to send remittances from abroad: ...
4. A self – balancing mechanism: ...
5. Specialisation in accordance with
comparative advantage: ...
6. Integration of World Economy:
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13. Thank You
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CA DR Prithvi Ranjan Parhi