Capital Account Convertibilty: By: Preeti N (766) Sumit H (803) Vinay N

CAPITAL ACCOUNT
CONVERTIBILTY
By:
Preeti N (766)
Sumit H (803)
Vinay N (809)
What is CAPITAL ACCOUNT Convertibility?
Definition:
“Capital Account Convertibility is a monetary policy that

centers around the ability to conduct transactions of local
financial assets into foreign financial assets freely and at
market determined exchange rates. It is sometimes referred
to as Capital Asset Liberation.”
CAPITAL ACCOUNT
CONVERTIBILITY
 Freedom to residents to convert local financial assets

into foreign assets, and/or to take on foreign liabilities
and invest proceeds in India or abroad.
 Freedom to non residents to create rupee assets or

liabilities and alter them .
Example:
1. Microsoft could issue a rupee bond in the Indian market.

Why capital account
convertibility?
 Capital account convertibility is considered to be one

of the major features of a developed economy. It
helps attract foreign investment. It offers foreign
investors a lot of comfort as they can re-convert local
currency into foreign currency any time they want to
and take their money away.
At the same time, capital account convertibility makes it

easier for domestic companies to tap foreign markets.
 Greater access for resident companies to foreign

capital and debt markets – reduce cost of capital
Tarapore Committe
 The Tarapore Committee appointed by the Reserve Bank

of India (RBI) was meant for recommending methods of
converting the Indian Rupee completely. The report
submitted by this Committee in the year 1997 proposed a
three-year time period (1999-2000) for total conversion
of Rupee.
Application
 In most traditional theories of international trade, the
reasoning for capital account convertibility was so that foreign
investors could invest without barriers. Prior to its
implementation, foreign investment was hindered by uneven
exchange rates due to corrupt officials, local businessmen had
no convenient way to handle large cash transactions, and
national banks were disassociated from fiscal exchange policy
and incurred high costs in supplying hard-currency loans for
those few local companies that wished to do business abroad.

 When CAC is used with the proper restraints, this is exactly
what happens. The entire outsourcing movement with jobs
and factories going oversees is a direct result of the foreign
investment aspect of CAC. The Tarapore Committee's
recommendation of tying liquid assets to static assets (i.e.,
investing in long term government bonds, etc) was seen by
many economists as directly responsible for stabilizing the
idea of capital account liberalization.
Reasons for the introduction of CAC
in India:
 The logic for the introduction of complete capital account

convertibility in India, according to the recommendations of
the Tarapore Committee, is to ensure total financial mobility
in the country. It also helps in the efficient appropriation or
distribution of international capital in India. Such allocation
of foreign funds in the country helps in equalizing the capital
return rates not only across different borders, but also
escalates the production levels. Moreover, it brings about a
fair allocation of the income level in India as well.
Benefits and drawbacks of CAC:
It enables relaxation of the Capital Account, which is under tremendous
pressure from the commercial sectors of India. Along with the financial
capitalists, the reputed commercial firms in India jointly derive and enjoy
the benefits of the CAC policy, which speculate the stock markets through
investments. In fact, the CAC policy in India is pursued primarily to gain the
speculator's and the punter's confidences in the stock markets.
To sum up, CAC is concerned about the ownership changes in domestic or
foreign financial assets and liabilities.
It also represents the formation and liquidation of financial claims on or by

the remaining world.
Conclusion
 India needs huge resources, especially to upgrade its infrastructure.
Domestic savings alone are not enough. More (net) foreign funds
would come in only if they are sure of free entry and exit.
 Indian businesses (especially, the established companies) would be

able to access cheaper
foreign funds that would improve their international cost
competitiveness.
 unhindered access to foreign funds would facilitate Indian

companies taking over firms abroad and developing more Indian
MNCs in the process
 Indian banks would be able to borrow foreign funds at lower
rates which would, in turn, enable them to lend at a lesser
rate to Indian small and medium enterprises which may not
otherwise be able to borrow directly from the international
capital market.
 cutting delays in foreign exchange trading would reduce

transaction costs and improve efficiency in Indian business
 ordinary Indian investors would be able to further diversify

their asset portfolios by investing abroad, thereby
improving their risk-return profile.
Thank You

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CAPITAL ACCOUNT

“Capital Account Convertibility is a monetary policy that

 Freedom to residents to convert local financial assets

 Freedom to non residents to create rupee assets or

1. Microsoft could issue a rupee bond in the Indian market.

 Capital account convertibility is considered to be one

At the same time, capital account convertibility makes it

 Greater access for resident companies to foreign

 The Tarapore Committee appointed by the Reserve Bank

reasoning for capital account convertibility was so that foreign

investors could invest without barriers. Prior to its

implementation, foreign investment was hindered by uneven

exchange rates due to corrupt officials, local businessmen had

no convenient way to handle large cash transactions, and

national banks were disassociated from fiscal exchange policy

and incurred high costs in supplying hard-currency loans for

those few local companies that wished to do business abroad.

 The logic for the introduction of complete capital account

It also represents the formation and liquidation of financial claims on or by

 Indian businesses (especially, the established companies) would be

 unhindered access to foreign funds would facilitate Indian

 cutting delays in foreign exchange trading would reduce

 ordinary Indian investors would be able to further diversify

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