This document discusses the convertibility of the Indian rupee, including its history and recommendations from committees on adopting full capital account convertibility. It explains that the rupee is currently partially convertible on the capital account and fully convertible on the current account. Two committees, the Tarapore Committee in 1997 and 2006, made recommendations on introducing capital account convertibility in phases. However, the document notes that India still needs to strengthen its fundamentals like education, healthcare and infrastructure before fully opening up to potential financial volatility from capital account convertibility.

1. Presented By:-
Deepa Pillai 2011062
Dhairya Gada 2011072
GROUP 8 Garima Shah 2011076
Paras Jain 2011093
Kallol Kumar Sarkar 2011096

2. Introduction

 The Indian rupee(Devanagari: ) is the official
currency of “The republic of India”.
 Today, the currency is available in the form of “Bank
notes” and “coins of the rupee”.

3. Convertibility

 Currency convertibility refers to the freedom to
convert the domestic currency into other
internationally accepted currencies and vice versa at
market determined rates of exchange.
 Export-Import of goods.
 Pursuing Higher education abroad.
 Tourism.

4. Types of Convertibility

 CURRENT ACCOUNT CONVERTIBILITY- allows
residents to make and receive trade related
payments. Example- import-export.
 CAPITAL ACCOUNT CONVERTIBILITY- means
the freedom to convert the local financial assets into
foreign assets.

5. Capital Convertibility

 Non-Convertible capital
 Cuba(peso) and North Korea(won)
 Non participation in FOREX market
 Major challenge for domestic currencies there.
 Partial Convertible Capital-
 Indian Rupee
 RBI’s restriction on the inflow and outflow of capital
 Full Convertible Capital-
 US dollars
 No restrictions or limitation on the amount to be traded
 Thus, this is one of the major currency traded in FOREX market

6. History of Rupee Convertibility

 Upto 1991, there was rigid control on both Capital
and Current account.
 Capital account convertibility was introduced in
India in August 1994.
 In 1997 the government had set up a committee
(Tarapore committee) to spell out a road map for the
full convertibility of the rupee.

7. Tarapore Committee

 Committee on capital account credibility, set up by
RBI(Reserve Bank of India) under the chairmanship
of former RBI deputy governor S.S. Tarapore.
 Economists Surjit S Bhalla, M G Bhide, R H Patil, A V
Rajwade and Ajit Ranade were the members of the
Committee.
 The report submitted by this Committee in the year
1997 proposed a three-year time period (1999-2000)
for total conversion of Rupee

8. Tarapore Committee

 Reasons for the introduction of CAC in India:
 It was meant to ensure total financial mobility in the country
 It also aimed in the efficient appropriation or distribution of
international capital in India
 Pre - conditions:
 The fiscal deficit needs to be reduced to 3.5% of the GDP
 Inflation rates need to be controlled between 3-5%
 Non-performing assets (NPAs) need to be brought down to 5%
 Cash Reserve Ratio (CRR) needs to be reduced to 3%
 A monetary exchange rate band of plus minus 5% should be
instituted

9. The Second Tarapore Committee on
Capital Account Convertibility

 Reserve Bank of India appointed the second Tarapore
committee to set out the framework for fuller Capital Account
Convertibility.
 The committee was established to revisit the subject of fuller
capital account convertibility in the context of the progress in
economic reforms, the stability of the external and financial
sectors, accelerated growth and global integration.
 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.

10. Recommendations

 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.
 At present the rupee is fully convertible on the current account,
but only partially convertible on the capital account.

11. Full Capital Account Convertibility

Pros And Cons

12. RBI too cautious?

The government is adopting a cautious
approach, taking into consideration all
aspects and the risks involved in
opening up the economy by allowing
convertibility of the currency.

13. Conclusion

 Not only is there instability in the international arena, but India’s
domestic economy is also going through ups and downs.
 The rising prices and the appreciation of the rupee are adversely
affecting India’s exports and the Balance of Trade.
 Moreover, the fiscal deficit has been highly underestimated by
ignoring the deficits of individual states and through issuance of oil
bonds to the public sector oil companies, making severe losses due
to the heavy subsidies on oil.
 The government is yet to compensate these companies and these
deferred payments have been left out from the deficit.
 Also, corruption, bureaucracy, red tapism and in general, a poor
business environment, are discouraging the inflow of investment.
 Poor infrastructure and socio-economic backwardness act as
deterrents to FDI inflow.

14. Conclusion

 Hence, India still needs to work on its fundamentals of
providing universal quality education and health services
and empowerment of marginalized groups, etc.
 The growth strategy needs to be more inclusive.
 There is no point trying to add on to the clump at the top of
the pyramid if the base is too weak. The pyramid will soon
collapse!
 Thus, before opening up to financial volatility through the
implementation of FCAC, India needs to strengthen its
fundamentals and develop a strong base.
 Hence, India should either wait for a while or implement
CAC in a phased, gradual and cautious manner.

15. 
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