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Capital account

Convertibility- the road ah

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Understanding Capital Account Convertibility

The RBI has defined Capital Accou

(CAC) as the freedom to convert lo

assets into foreign financial assets a

market determined rates of exchan

sort of intermediation and regulatio

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Local merchants

Anybody from anywhere in the world can in that currency.

Thus a US citizen could buy a flat in India

Since this is not allowed in India ,we say thhave full CAC.

So what is its use?

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Portfolio

Investment.

Stocks, Bonds,

Bank Loans, Derivatives

DirectInvestment.

Real estate

Production

facilities

Equity

investment.

Other

investmen

Holdings

loans

Bank

accounts

Currenc

Capital Account Transactions

Classification

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Hallmarks of a developed economy.

Features

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Good Times huge inflows of foreign capi

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Bad times enormous outflow of capita

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Global capital inflows .

Access to cheaper external credit.

Chance of export of domestic savings.

Features

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Comparison of Financial Openness

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Relaxation of the control by the Gov

RBI Limits with respect to foreign c

1. PrivateVisit - $10000

2. Business Travel - $25000

3. Gift/Donation - $5000

4. Employment/Immigration/Studies

5. Investment in Foreign Stock - $2500

Current

Restriction

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End of Balance of Payment (BoP) cr

PROs

-500

0

500

1000

1500

2000

2500

China Germany Russia

BOP

Exports Imports Balance of payme

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Plenty of Foreign Currency Reserves.

PROs

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Efficiency in Financial System.

Development of Securities Market

Worldwide Presence and Friendly Re

Diversify Portfolios Internationally.

PROs

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Depreciating Rupee.

CONs

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Volatility in Stock Markets

CONs

fl

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Impact on Inflation

CONs

I i li

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Income inequality

CONs

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Capital account convertibility is a processpersonally believe we should go forwardpace -

The lessons of the global crisis are inenthusiasm for capital account convertibility

-

There is a need to proceed with CAC bpace -

Quotes

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Infrastructure

liquidity position.

Hedge risks

Transparency

Regulation policies

Recommendations

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Capital account openness maymacroeconomic instability and dfinancial markets.

Liberalization of the capital account bring about far reaching changdeveloping country scenario and imwide range of activities.

Conclusion

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