Capital account Convertibility

•  The government is not yet ready for full capital account convertibility even though former governor of RBI Raghuram rajan had said the central bank was looking at bringing in capital account convertibility in a few years.
• India currently has full convertibility of the rupee in current accounts such as for exports and imports. However, India’s capital account convertibility is not full. There are ceilings on government and corporate debt, external commercial borrowings and equity.

About Capital account convertibility:

• Capital Account Convertibility means that the currency of a country can be converted into foreign exchange without any controls or restrictions. In other words, Indians can convert their Rupees into Dollars or Euros and Vice Versa without any restrictions placed on them. The reason why it is called capital account convertibility is that the conversion of domestic currencies into foreign currencies is allowed in the capital account and not only the current account.
• Capital account refers to expenditures and investments in hard assets, physical premises, and factories as well as investments in land and other capital-intensive items

Analysis:
Advantages

• Full capital account convertibility opens up the country’s markets to global players, including investors, businesses and trade partners. This allows easy access to capital for different businesses and sectors, positively impacting a nation’s economy.
• Opening up to fully convertible currency is a solid sign that a country and its markets are stable and mature enough to handle free and unrestricted movement of the capital, which attracts investments making the economy better.
• With increased participation from global players, new businesses, strategic partnerships and direct investments flourish. It also helps in creating new employment opportunities across various industry sectors, as well as nurturing entrepreneurship for new businesses.
• Sectors like insurance, fertilizers, retail, etc. have restrictions on foreign direct investments. Full convertibility will open the doors of many big international players to invest in these sectors, enabling much-needed reforms and bringing variety to the Indian masses.
• Indian businesses will be able to issue foreign currency-denominated debt to local Indian investors.
• Indian businesses will be able to hold foreign currency deposits in local Indian banks for capital requirements.
• Indian banks will be able to borrow/lend to foreign banks in foreign currencies.

Disadvantages

• Amid a lack of suitable regulatory control and rates subject to open markets with large number of global market participants, high levels of volatility, devaluation or inflation in forex rates may happen, challenging the country’s economy.
• Businesses can easily raise foreign debt, but they are prone to the risk of high repayments if exchange rates become unfavorable
• A rising unregulated rupee makes Indian exports less competitive in the international markets. Export-oriented economies like India and China prefer to keep their exchanges rates lower to retain the low-cost advantage.
• Full capital account convertibility has worked well in well-regulated nations that have a robust infrastructure in place. India’s basic challenges—high dependence on exports, burgeoning population, corruption, socio-economic complexities and challenges of bureaucracy—may lead to economic setbacks post-full rupee convertibility.