Capital Account Convertibility is one of the essential parameters for India to integrate the economy with global economy. But the question is how far the Indian economy is strong enough to allow full capital convertibility and who will give financial guarantee to India if Indian economy collapses due to full Capital Account Convertibility? In the context of globalization, every economy is supposed to go in for capital account convertibility, if not today, maybe tomorrow.
Convertibility of currency means that the currency can be exchanged for any other convertible currency, without any restriction, at the market determined exchange rate. Thus, it means that the rupee can be freely converted into dollar, pound sterling, yen, Deutsche mark, etc., and vice versa at the rates of exchange determined by the demand and supply forces.
In a broader sense, the currency convertibility means instituting exchange arrangements whereby residents, non-residents and foreigners can exchange (transform) freely (without limit) domestic currency for (into) any foreign currency or gold and vice versa at a predetermined (fixed) or a variable but legal (not unofficial or parallel) market rate of exchange for the purpose of transactions on trade, invisible, current and capital accounts.
According to one working definition, "Currency is convertible if domestic nationals wishing to buy foreign goods and servicescan freely sell domestic for foreign currencyat a single but possibly variable foreign exchange rate covering all current transactions inclusive of normal trade credit, whereas foreigners (non-residents) with balances in domestic currency arising from current transactions can sell them at the same foreign exchange rate or purchase domestic goods freely at prevailing domestic currency prices." |
