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Current and

capital account
Convertibility
Presented by-: JOGINDER
Roll no-: 16

Currency Convertibility
What it is ?
Convertibility essentially means the ability
of
residents
and
non-residents
to
exchange domestic currency for foreign
currency, without limit, whatever be the
purpose of the transactions.
Types Of Currency Convertibility.
Fully convertible currency.
Partially convertible currency.
Non-convertible currency.

Rupee
Convertibi
lity

Current Account
Refers to currency convertibility required in
case of transaction relating to exchange of
goods and services, money transfer and all
those transaction that are classified in
current account
Transactions relating to:
- Exchange of goods and services
- Money transfers
- Transactions that are classified in the
Current Accounts.
In Short, Current account includes all
transactions, which give rise to or use of our
National Income.

Current Account
Transactions
All imports and exports of merchandise.
Invisible Exports and Imports
Inward private remittances (to & from)
Pension payments (to & from)
Government Grants (both ways)

Current Account Convertibility


Indian scenario - fully convertible.
Full freedom to both residents and nonresidents.
RBI has placed a cap in creation of a
capital asset
Freedom in respect of payments and
transfers for current international
transactions.

Capital account
convertibility

Refers to convertibility required in the


transaction of capital flow that are classified
under the capital account balance of payment

Inflows and Outflows of capital.

Borrowing from or Lending to aboard.

Sales and Purchase of securities aboard.

Capital Account
Transactions
Capital Direct Foreign
Investments.
Investment in securities.
Government Loans.
Short-term investments.

Capital Account Transactions


Classification
Direct
Portfolio
Investment . Investment.
Stocks,
Bonds,
Bank
Loans.

Real estate
Production
facilities
Equity
investment.

Other
investment.

Holdings in
loans
Bank
accounts
Currencies

Currently Restrictions : Capital Account

Limits to companies borrowing abroad.


Restriction on foreigner investing in India.
Restriction on amount that FII can hold.
Purchasing a company is allowed but limit
exit on the amount that can be send.
Global
Diversification
of
household
portfolio is practically non-existent.

Reasons Favoring Financial


Openness & CAC

Diversification
NRI Remittances
Foreign Investment
Catalyst for financial market, institutional
development, competition, new
technologies & discipline macroeconomic policies.
Reduction in the size of Black money.
Induces competition against Indian
finance.

Reasons favoring Restrictions


Good times- More inflow; Bad timesMore outflow.
Misallocation of Capital inflows.
Export of domestic Savings.
Entry of Foreign banks can create
Unequal playing field.
Highly volatile international finance
(hot money)- Higher speculation.

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

Contd...
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

Kelkar committee
This committee is headed by vijay
kelkar.
This committee emphasis
on fiscal consolidation.

Fiscal consolidation
Fiscal consolidationis a
reduction in the underlying
fiscal deficit. It is not aimed at
eliminating fiscal debt.

the government forms annual budget which


includes its income and expenses. fiscal
deficit is when the government has to borrow
money to meet its expenses .FD=EX -INCOME
When the FD starts to increase, , year after
year , as is the case, the debt burden of the
government increases... then the gov. tries to
reign in its debt by adopting Fiscal
Consolidation methods.....i.e . spend less and
wisely

Observation of kelkar
committee
High fiscal tends to
I. High inflation.
II.Employment and inflation be
politically disability for the
government.

How to increase incoming


money

Increase collection of Direct


Tax

Review the DTC bill.


PAN and UID card mandatory.
Create profile.
Charge interest on tax defaulter.

How to increase the


collection of Indirect Tax
Increase the coverage of service tax.
Implement goods and services.
6% excise duty of merit goods.

How to decrease outgoing


money
Reduce subsidy.
Charge focus of government.

Difference between current and


capital account convertibility
capital
A capital account refers
to capital transfers and
disposal of flow
produced non financial
asset.
Capital account
convertibility allows free
movement from local
currency in foreign
currency and vice a
versa.

current
A current account
refers to goods and
services income and
current transfers.
A current account
convertibility allow
free inflow and outflow
for all purposes other
purposes such
investment loans.

Any Questions...?

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