Mar 27 An earlier committee, also headed by Mr Tarapore, had provided a three-year frame-work for transition to full capital account convertibility by What is capital account convertibility There is no formal definition of capital account convertibility CAC. However, the Tarapore committee set up by RBI to go into the question of CAC in defined it as the freedom to convert local financial assets into foreign financial assets and vice versa at market determined rates of exchange.
Currency convertibility refers to the freedom to convert the domestic currency into other internationally accepted currencies and vice versa.
Current account convertibility means freedom to convert domestic currency into foreign currency and vice versa to execute trade in goods and invisibles.
On the other hand, capital account convertibility implies freedom of currency conversion related to capital inflows and outflows. Compared to current account convertibility, capital account convertibility is a complex issue because of the peculiar feature of capital account transactions.
An important one is the high frequency and volume of international capital movements across borders which may produce many macroeconomic effects in host countries like India. Meaning of Capital Account Convertibility CAC Capital Account Convertibility is not just the currency convertibility freedom, but more than that, it involves the freedom to invest in financial assets of other countries.
It provides rights for firms and residents to freely buy into overseas assets such as equity, bonds, property and acquire ownership of overseas firms besides free repatriation of proceeds by foreign investors.
Why capital account convertibility? Countries prefer capital account convertibility to promote the inflow of foreign capital. Despite the various risk associated with capital flows like fluctuations in various segments of the financial market, countries like India goes for it to get the advantage of having additional foreign capital.term paper on international financial management “ full capital account convertibilty- is india prepared ”from sumit sukhija smf Indian banks' risk management needs to be improved further to address the challenges arising from fuller capital account convertibility.
Prudential and regulatory measures are needed to prepare India's financial system to manage the risks arising from fuller capital account convertability. Capital account convertibility means that its residence can purchase foreign exchange for the sake of buying financial assets from abroad, such as stocks or bonds or opening a bank account in another country, and similarly that foreigners can purchase domestic financial assets.
At this stage, full capital account liberalisation promises no large benefits while it increases the risk of things going badly wrong. Variations in the flow of short-term capital, like bank loans. Capital account convertibility should be treated as a process and not an event.
The plan for further convertibility on capital account will depend, however on several factors, as . Till date the capital account convertibility remains a major question for the government to decide whether full rather fuller convertibility on capital account shall or not be in the larger interest of the economy of our country, particularly when there are glaring examples of many countries which allowed full capital convertibility.