Current Situation in India Basics Capital account is made up of both the short-term and long-term capital transactions. The Capital Transaction may be Capital outflow or capital inflow. Convertibility on the capital account is usually introduced after a certain period of introducing the Current account convertibility.
May 19, Stating that India would become a truly globalised economy in the not-too-distant a future, he felt that the country could not afford to remain isolated for a very long period of time. Padmanabhan conceded that there were risks associated with full capital account convertibility.
Yet, he felt that resisting liberalization over an extended period could prove futile and counter-productive. As the economy got more globalised, it would become harder to maintain closed capital accounts, Mr. Corporates could use transfer pricing to get around capital account restrictions, he said.
However, keeping any restriction for too long could prove self-defeating as people ended up finding new methods of bypassing that restriction, he added.
Ipso facto, he felt, India should move towards full capital account convertibility. How fast that movement should be would, however, depend on how fast the country could meet the pre-conditions such as fiscal consolidation, inflation control, low level of NPAs non-performing assetslow and sustainable current account deficit, strengthening of financial markets, prudential supervision of financial institutions etc.
Sound policies, robust regulatory framework promoting a strong and efficient financial sector, and effective systems and procedures for controlling capital flows greatly enhanced the chances of ensuring that such flows fostered sustainable growth and did not lead to disruption and crisis, he said.
What does capital account convertibility mean? Essentially, it means freedom to convert local financial assets into foreign ones at market-determined exchange rates. What can it do? It can lead to free exchange of currency at lower rates.
Also, it can result in unrestricted mobility of capital. How does it benefit a nation?
It can trigger stepped up inflow of foreign investment. Transactions also can become much easier, and occur at a faster pace.
What are the negatives? It could destabilise an economy especially if there is massive capital flows in and out of the country. Where does India stand now? India currently has full convertibility of the rupee in current accounts such as for exports and imports.
There are ceilings on government and corporate debt, external commercial borrowings and equity. Sign up to receive our newsletter in your inbox every day!India is still a country of partial convertibility () in the capital account, but inside this overall policy, enough reforms have been made, and to certain levels of foreign exchange requirements, it is an economy allowing full capital account convertibility.
Following is the answer key for the recently conducted General Studies Paper – 1 (Set – C) of the UPSC civil services preliminary exam. We have tried to provide best possible explanation for each question based on various authentic sources. Pros (for) of Capital Account Convertibility for India.
It allows domestic residents to invest abroad and have a globally diversified investment portfolio; this reduces risk and stabilizes the economy. A globally diversified equity portfolio has roughly half the risk of .
The term Capital Account Convertibility was coined by RBI and this term is almost synonymous with the RBI committee headed by SS Tarapore.
Capital account convertibility (CAC) means the freedom to convert local financial assets into foreign financial assets and vice versa at market determined rates of exchange.
Published: Mon, 5 Dec In India, a decade old on-going financial reforms have transformed the operating environment of the finance sector from an “administrative regime to .
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