What is Capital Account Convertibility?

India needs to move towards full capital account convertibility and deepen its capital market to become a leading global economy. This has been the reiteration by the authorities. India already has current account convertibility - meaning resident Indians and companies can make and receive payments for import/export of goods and services and be able to access foreign currency for travel, education, medical or other designated purposes. What is Capital Account Convertibility (CAC)? This refers to the freedom to convert local financial assets into foreign financial assets and vice versa at market determined rates of exchange.

It is associated with changes of ownership in foreign/domestic financial assets and liabilities and embodies the creation and liquidation of claims on, or by, the rest of the world, which itself is re-integrating into a common goal of development. The post-1991 liberalization reforms have been changing the face of the Indian economy. The country has witnessed exceptional growth rates of 9.6% and 9.4% in 2006 and 2007, respectively. In the given circumstances, the key issue to be considered is whether India is ready to take the plunge towards Full Capital Account Convertibility (FCAC).

Referred to as ‘Capital Asset Liberation’ in foreign countries, it implies free exchangeability of currency at lower rates and an unrestricted mobility of capital. India presently has current account convertibility, which means that foreign exchange is easily available for import and export for goods and services.At present, there are limits on investment by foreign financial investors and also caps on FDI ceiling in most sectors. Economists say that jumping into capital account convertibility game without considering the downside of the step could harm the economy. Being on a firm ground, India can now steadily move towards fuller capital account convertibility.