A
PAPER
On
“CONVERTIBILITY OF INDIAN RUPEE”

By, Sr. No | Name | PRN | 1 | Mr. Sachin Jadhav | 15020448102 | 2 | Mr. Santosh Ghongade | 15020448103 | 3 | Mr. Rajan Batra | 15020448104 | 4 | Mr. Narayan P.S | 15020448105 | 5 | Mr. Sameep Gadkari | 15020448106 | 6 | Mr. Nandkumar | 15020448015 | 7 | Mr. Bhushan Patil | 15020448027 | 8 | Mr.Vikrant Birje | 15020448056 |

Guided By,
Prof.S.K.Vaze
International Financing

TABLE OF CONTENTS

Sr. No | Topics | Page No. | 1 | Objectives | 3 | 2 | Foreign Exchange-An Overview | 3 | 3 | Convertibility of Indian Rupee-History | 4 | 4 | Convertibility of Currency-Meaning | 4 | 5 | Current Account Convertibility | 5 | 6 | Capital Account Convertibility * Important Provisions under FEMA | 6,7 | 7 | Convertibility of Indian Rupee-Positive Effects | 9 | 8 | Capital Account Convertibility-Negative Effects | 10 | 9 | Key Points and Analysis | 12 | 10 | Conclusion and Recommendations | 14 | 11 | Bibliography | 15 |

Objectives: A. To know Foreign exchange mechanism followed in the past and current practices.

B. To understand the concept of “Convertibility of Currency”

C. To Study journey of convertibility of Indian rupee pre and post Liberalisation and impact on exchange rate.

D. Brief study of Indian laws of regulations and prohibitions in context of the currency convertibility so far.

E. Understand the provisions under FEMA.

F. Study the other countries policies on ‘convertibility of currency’ and its impact on their economies in brief.

G. Study of positive and negative side of convertibility of Indian rupee and results of the same till now.

H. Analysis of effects of ‘convertibility of Indian rupee’ with the help of current economic trends like Rate of Exchange, and threats like Balance of Trade- deficits/surplus in a broader sense.
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1. FOREIGN EXCHANGE- An Overview
Foreign Exchange has been defined as the mechanism of converting currency of one country into currency of another country. So, the mechanism ideally should:- a) facilitate international trade and capital movement by ensuring that international payments can be made easily; b) adjustments of balance of payments fluctuations; c) ensure fair-play of market forces in the determination of exchange rates; and d) respect individual national policies and not interfere with the domestic affairs of a country.
Previously, the exchange rate between the currencies was determined by the relative value of gold content of currencies concerned. For example, if the gold content of Indian rupee was 5 grains of standard purity, and US dollar 60 grains of standard purity, the rate of exchange between Indian rupee and US dollar was being determined as under: 1 Rupee = 5/60 = USD 0.0833 1 USD = 60/5 = Rs. 12
This rate of Exchange was known as “mint par of exchange”.
Theoretically, the exchange rate system followed by a country can fall under either of - Fixed Exchange Rate or Floating Exchange Rate.
a) Fixed Exchange rate: The exchange rate is controlled fully by the monetary authorities. It refers to the system under the gold standards where the rate of exchange tends to stabilize around the ‘mint par value’. In present situation where gold standard no longer exists, fixed rate of exchange refers to maintenance of external value of the currency at a predetermined level. Whenever the exchange rate differs from this level it is corrected through official intervention. When IMF was instituted, every member country was required to declare the value of the currency in terms of gold and US dollars (known as the ‘par value’).
b) Floating Exchange Rates: Free or floating exchange rate refers to the system where the exchange rates are determined by the conditions of demand for and supply of foreign exchange in the market. Under floating rates no ‘par value’ is declared and the central bank does not intervene in the market.
2. Convertibility of Indian Rupee-HISTORY
In 70’s and 80’s many countries switched over to the free convertibility of their currencies into foreign exchange. By 1990, 70 countries of the world had introduced currency convertibility on current account; another 10 countries joined them in 1991.
As a part of new economic reforms initiated in 1991, rupee was made partly convertible. From March 1992 under the “Liberalized Exchange Rate Management scheme”, in which 60% of all receipts on current account (i.e. merchandise exports and invisible receipts) could be converted freely into rupees at market determined exchange rate quoted by authorized dealers (AD), while 40% of them was to be surrendered to Reserve Bank of India at the officially fixed exchange rate.
These 40% exchange receipts on current account was meant for meeting Government needs for foreign exchange and for financing imports of essential commodities.
This partial convertibility of rupee on current account was adopted so that essential imports could be made available at lower exchange rate to ensure that their prices do not rise much. Further, full convertibility of rupees at that stage was considered to be risky in view of large deficit in balance of payments on current account.
As even after partial convertibility of rupee, foreign exchange value of rupee remained stable. Full convertibility on current account was announced in the budget 1993-94. From March 1993, rupee was made convertible for all trade in merchandise. In March, 1994, even indivisibles and remittances from abroad were allowed to be freely convertible into rupees at market determined exchange rate. However, on capital account rupee remained nonconvertible. Convertibility of Currency-meaning:
Convertibility of a currency refers to its convertibility into foreign currency as desired by its holder. It can be fully convertible, partially convertible or Non convertible as specific case may be decided by central bank.
The currency is fully convertible if the holder can convert it into any other currency at rates determined by the forces of demand and supply and without any interference from the government. In short, the currency of a country can be freely converted into foreign exchange at market determined rate of exchange.
Full convertibility therefore involves two aspects: i. The rate of exchange should be determined by the market and not by the regulatory authority and thus the holder does not incur any loss on conversion; and ii. There should not be any quantitative restrictions on the repatriation of the currency.
Earlier the exchange rate of rupee was subject to the condition that, the rate quoted by a bank should be based on the RBI Rate. Now, the value of Rupee is fully determined by the market forces and it fulfils the first condition of convertibility.
A currency is converted to effect remittances, either from country or into the country. Remittances are broadly classified into two categories as: a) ‘Current’ Account convertibility and b) ‘Capital’ Account convertibility
A) CURRENT ACCOUNT CONVERTIBILTIY:-
Rupee is now fully convertible on current account fulfilling the second condition for convertibility, viz. No quantitative ceiling on remittances abroad, through subject to certain regulations. The limits on remittances for various purposes like travel, studies, medical treatments, gifts, services etc. have become indicative. As an affirmation of convertibility of rupee on current accounts, with effect from August 20, 1994 India moved over to Article VIII status in the IMF. IMF members accepting the obligations of Article VIII undertake to refrain from imposing restrictions on the making of payments and transfers for current international transactions or from engaging in discriminatory currency arrangements, multiple currency practices without IMF approval.
Graph below shows Current Account deficit trend since 1990.
The current account deficit in India narrowed to USD 8.2 billion in the third quarter of 2015 from a USD 10.9 billion gap a year earlier, mainly due to a lower trade deficit (USD 37.4 billion from USD 39.7 billion). The current account gap for the three months to September of 2015 corresponds to 1.6 percent of the country's GDP. Considering April to September of the 2015-16 fiscal year, the current account gap narrowed to 1.4 percent of GDP compared to 1.8 percent in the previous year. Current Account in India averaged -1722.32 USD Million from 1949 until 2015, reaching an all time high of 7360 USD Million in the first quarter of 2004 and a record low of -31857.20 USD Million in the fourth quarter of 2012. Current Account in India is reported by the Reserve Bank of India.

B) CAPITAL ACCOUNT CONVERTIBILITY:- Convertibility of rupee on capital account means allowing foreign exchange for purchasing stocks, bonds in Indian stock markets or for direct investment in power projects, highways steel plants etc. and gets them freely converted into rupees without taking any permission from the government. Since capital account convertibility is risky and makes foreign exchange rate more volatile, is introduced only sometimes after the introduction of convertibility on current account when exchange rate of currency of a country is relatively stable, deficit in balance of payments is well under control and enough foreign exchange reserves are available with the Central Bank.
Reserve Bank of India, in February 1997 appointed a committee on Capital Account Convertibility (CAC) under the Chairmanship of Sri. S.S. Tarapore. The committee has submitted report on May 30, 1997. A committee made a survey of International experience in capital account convertibility. The countries which initiated the move to CAC on the basis of strong fundamentals were able to modulate the pace of instituting CAC. But those countries which ignored these were required facing critical financial crisis.
The following are the important preconditions for CAC suggested by ‘Tarapore committee’:- i. A strong Balance of payment. ii. The strengthening of Financial System. iii. Fiscal Consolidation. iv. Conduct of an appropriate exchange rate policy.
The committee stipulated preconditions in important areas for the implementation of CAC. They are:
I) Strengthening of Financial System: * Interest Rates should be fully deregulated in 1997-98. * The average effective CRR should be reduced to 8% in 1997-98, 6% in 1998-99 and further to 3% in 1999-2000. * Gross non-performing assets to be brought down to 12% in 1997-98, 9% in1998-99 and 5 % in 1999-2000.
II) Fiscal consolidation: The ratio of Centre’s gross fiscal deficit to gross domestic production to be produced from a budgeted 4.5% in 1997-98 to 4% in 1998-99 and further to 3.5% in 1999-2000.
Mandated Inflation Rate: The inflation for three year period (1997-2000) should be an average of 3.5%.
CAC should be implemented in three phases over three years; Phase I-1997-98, Phase II-1998-99 and phase III-1999-2000.
III) Exchange Rate Policy: On the exchange Rate Policy, the reserve bank should have monitoring band of 5% around the neutral Real Effective Exchange Rate (REER) (REER is the exchange Rate for the currency adjusted for the inflation rate differential) The reserve bank should ordinarily intervene as and when the REER is outside the band.

IV) Adequacy of Reserves:
The following four indicators should be for evaluating the Adequacy of the Reserves: i. Reserves should not be less than six months of Imports. ii. Reserves should not be less than three months plus 50% of debt service payments plus one month’s exports and imports. iii. The foreign exchange assets to currency ratio should be prescribed by Law at not less than 40%.
India is already moving towards capital Account convertibility (CAC), though not at the speed envisaged by the committee. * Provisions under FEMA:
The Foreign Exchange management Act, 1999, which came into force with effect from June 2000, continues restrictions on capital account transactions. Section 6(2) provides that the Reserve Bank may, in consultation with the central Government specify the permissible classes of capital account transactions and the limit up to which foreign exchange shall admissible for such transactions. Only such transactions which are permitted under specific or general permission of Reserve Bank can be carried out. Thus rupee remains only partially convertible for capital account transaction.
Some important provisions in India on capital account transactions are as follows: Authorised Dealers (AD) | RBI has provided license to the entities for dealing in foreign exchange.a) Authorised Dealers Category-I (Public, Private and Foreign Banks).b) Authorised Dealers Category-II (Authorised on the city basis. They include cooperative banks, private forex dealers and travel agents etc.)c) Authorised Dealers Category-III (Non Banking Finance Corporations) The authority vested in the hands of AD-I is largest (ranging from stock market transactions to NRI accounts, ECBs, ADRs etc.) while other categories of ADs have a limited role to play. | Foreign Direct Investment (FDI) | FDI is restricted in the following sectors:a) Multi brand Retailing.b) Lottery (public, private, online), gambling, betting and casino.c) Chit funds and Nidhi Company.d) Trading in Transferable Development Rights in real estate business or construction of farm houses.e) Manufacturing of Cigars, cheroots, cigarillos and cigarettes, of tobacco or of tobacco substitutes.f) Atomic energy and Railway transportIn rest other sectors such as agriculture, mining, manufacturing, broadcasting, print media, aviation, courier services, construction, telecom, banking, insurance etc; the limits of FDI ranges from 26% to 100%. All the foreign operators have to abide by the sectoral restrictions of the statutory regulators in addition to FDI rules. | ADRs/ GDRs by Indian companies | Indian companies can raise additional finances abroad through the issue of ADRs/ GDRs, in accordance with guidelines issued by the Government of India. Unlisted companies, which have not so far accessed the ADR/GDR route for raising funds in the global market, would require prior listing in the domestic market.Unlisted companies, which have already issued ADRs/GDRs in the international market, have to list in the domestic market on making profit or within three years of such issue of ADRs/GDRs, whichever is earlier. | External Commercial Borrowings (ECBs)/ Foreign Currency Convertible Bonds (FCCBs) | The ECB limit under the automatic route is enhanced to USD 750 million.a) ECBs up to $20 million in a financial year should have a minimum average maturity of three years.b) ECBs of more than $20 million and up to $750 million or equivalent should have a minimum average maturity of 5 years.c) Eligible borrowers under the automatic route can raise Foreign Currency Convertible Bonds (FCCBs) up to USD 750 million or equivalent per financial year for permissible end-uses.d) Corporate in services like hotel, hospital and software can raise FCCBs up to USD 200 million or equivalent for permissible end-uses during a financial but the proceeds of the ECB should not be used for acquisition of land.e) ECB / FCCB availed of for the purpose of refinancing the existing outstanding FCCB should be viewed as part of the limit of USD 750 million. | Government Securities | NRIs and SEBI registered FIIs are permitted to purchase Government Securities/Treasury bills and Corporate debt. The details are as under:1. On repatriation basis a Non-resident Indian can purchase without limit,a) Dated Government securities (other than bearer securities) or treasury bills or units of domestic mutual funds.b) Bonds issued by a public sector undertaking (PSU) in India.c) Shares in Public Sector Enterprises being disinvested by GoI.2. On non-repatriation basis:-a) Dated Government securities (other than bearer securities) or treasury bills or units of domestic mutual funds.b) Units of Money Market Mutual Funds in India.c) National Plan/Savings Certificates.A SEBI registered FII may purchase, on repatriation basis, dated Government securities/ treasury bills, listed non-convertible debentures/ bonds issued by an Indian company and units of domestic mutual funds either directly from the issuer of such securities or through a registered stock broker on a recognised stock exchange in India. The FII investment in Government securities and Corporate debt is subject to the Investment limit. For the FIIs in Government securities currently is USD 10 billion and limit in Corporate debt is USD 20 billion. | Joint Venture/ Wholly owned subsidiary | Overseas Investment can be made under two routes (i) Automatic Route and(ii) Approval Route Under Automatic Route, an Indian party has been permitted to makeinvestment in overseas Joint Ventures (JV) / Wholly Owned Subsidiaries (WOS), not exceeding 400% of the net worth as on the date of last audited balance sheet. Investment in an overseas JV / WOS may be funded out of one or more of the following sources:a) Drawal of foreign exchange from an AD bank in Indiab) Capitalisation of exportsc) Swap of sharesd) Proceeds of ECBs / FCCBse) Balances held in EEFC account of the Indian partyf) Proceeds of foreign currency funds raised through ADR / GDR issues.In respect of (e) and (f) above, the ceiling of 400% of the net worth will not apply. Approval of the Reserve Bank: Sectors have been currently reserved for RBI approval. Investments in energy and natural resources sector, overseas investments by Proprietorship concerns and Registered Trust / Society require | Foreign Institutional Investment (FII) | Non Resident Indians (NRI)/Persons of Indian Origin (PIO) are allowed to make direct investment in Indian companies under the automatic route.FII/ NRI/ PIO/HNIs are allowed to invest in the following:a) Securities in the primary and secondary markets including shares,debentures, and warrants of companies, unlisted, listed, or to be listed on a recognized stock exchange in Indiab) Units of schemes quoted by domestic mutual funds including the Unit Trust of India, whether listed or not listed on a recognized stock exchangec) Government securitiesd) Derivativese) Commercial paperf) Security receiptsg) Indian Depository ReceiptsSEBI registered FIIs and its sub accounts cannot exceed 10% of the paid up capital of the Indian company. For High Net worth Individuals (HNIs), NRIs and PIOs this limit is 5%.Facilitators: Purchase is made through a stock exchange or through the designated branch of an authorized dealer. |

Convertibility of Indian Rupee – Positive Effects
Convertibility of a currency has several advantages which we discuss briefly:

1. Encouragement to exports:
An important advantage of currency convertibility is that it encourages exports by increasing their profitability. With convertibility profitability of exports increases because market foreign exchange rate is higher than the previous officially fixed exchange rate. This implies that from given exports, exporters can get more rupees against foreign exchange (e.g. US dollars) earned from exports. Currency convertibility especially encourages those exports which have low import-intensity.
2. Encouragement to import substitution:
Since free or market determined exchange rate is higher than the previous officially fixed exchange rate, imports become more expensive after convertibility of a currency. This discourages imports and gives boost to import substitution.
3. Incentive to send remittances from abroad:
Thirdly, rupee convertibility provided greater incentives to send remittances of foreign exchange by Indian workers living abroad and by NRI. Further, it makes illegal remittance such ‘hawala money’ and smuggling of gold less attractive.
4. Self – balancing mechanism:
Another important merit of currency convertibility lies in its self-balancing mechanism. When balance of payment is in deficit due to over-valued exchange rate, under currency convertibility, the currency of the country depreciates which gives boost to exports by lowering their prices on the one hand and discourages imports by raising their prices on the other.
In this way, deficit in balance of payments get automatically corrected without intervention by the Government or its Central bank. The opposite happens when balance of payments is in surplus due to the under-valued exchange rate.
5. Specialization in accordance with comparative advantage:
Another merit of currency convertibility ensures production pattern of different trading countries in accordance with their comparative advantage and resource endowment. It is only when there is currency convertibility that market exchange rate truly reflects the purchasing powers of their currencies which is based on the prices and costs of goods found in different countries.
Since prices in competitive environment reflect that prices of those goods are lower in which the country has a comparative advantage, this will encourages exports. On the other hand, a country will tend to import those goods in the production of which it has a comparative disadvantage. Thus, currency convertibility ensures specialization and international trade on the basis of comparative advantage from which all countries derive benefit.
6. Integration of World Economy:
Finally, currency convertibility gives boost to the integration of the world economy. As under currency convertibility there is easy access to foreign exchange, it greatly helps the growth of trade and capital flows between the countries. The expansion in trade and capital flows between countries will ensure rapid economic growth in the economies of the world. In fact, currency convertibility is said to be a prerequisite for the success of globalization.
Convertibility of Indian Rupee- Negative Effects
It is a discernible fact that a number of empirical studies do not find evidence that greater openness of capital account and higher flows of capital lead to advanced growth. Some economists believe that the opening up of capital account is the last mile connectivity to the globalised world; to others it symbolise a shortcut to economic ruination. India’s most recent negative experiences with the capital account liberalisation are as follows:
1. Depreciating Rupee:
With the liberalisation of capital account large amount of money is flowing in and out of the economy. Subsequently rupee has become highly volatile and slipped now to its all time low (1$=67.9). India’s imports are greater than its exports and former has further declined due to financial crisis in Euro zone. Reserve Bank is not able to sure peg rupee at harmless levels, consequently import shave become too expensive and the risk of widening trade deficit is obvious. Reserve Bank has to buy or sell dollars in substantial amount to maintain the value of rupee at reasonable levels. Weakening rupee has also created problems in setting appropriate interest rates.
2. Volatility in Stock Markets:

International financing and investment shifts from country to country in search of higher speculative returns. Stock markets have undergone this phenomenon rapidly. In good times of the economy (good rating, healthy IIP, high GDP, political stability) foreign institutional investors are on buying spree, but in bad times FII quickly lose their confidence in market and there is an abnormal selling. Investors experience huge losses. Some become bankrupt too.

3. Debilitating Impact on Inflation:

Capital convertibility has lead to exchange rate volatility of the Rupee resulting in macroeconomic instability caused through the risk of rapid and large capital outflows as well as inflows. When capital flows are large money supply increases and RBI comes up with tightening of monetary policy. Also, India imports approximately 75% of its crude requirements. This has upset the economy and has a debilitating impact on inflation within India. Such speculative capital flows have made domestic monetary policy virtually ineffective.

4. Asset Liability Mismatch of Banks:

In global experience with convertibility, banking envisages to be another weaker link. Banks are facing an inequality between their assets and liabilities. Banks generally refuse to lend a company which has a debt equity ratio of more than 2. Indian banks presently have high debt because of cheap borrowing through ECBs. Moreover high interest rate in market on borrowings has led to slump in demand of loans and advances. Decline in loans and advances on the asset side of balance sheet has increased the pressure to sustain the same maturity period for deposits and the asset liability management has come under strain. RBI has eased guidelines for External Commercial borrowings to resolve Asset liability mismatch of banks. The External Commercial borrowings up to $20 million in a financial year should have a minimum average maturity of three years and the ECBs up to $750 million or equivalent should have a minimum average maturity of five years.

5. Flow of Black Money through Participatory Notes (P-Notes):

SEBI allowed issue of P-Notes to FII in 2006. Concerns have been raised on the secrecy afforded to investors through P-Notes. Different types of foreign entities are eligible for the issue of P-Notes but the identity of the actual investor may be mysterious to the regulatory bodies. Therefore some of the money invested in the market through P-Notes may be unaccounted wealth of affluent Indians hidden beneath the pretext of FII investment. Such funds could be tainted and linked with unlawful activities like corruption and smuggling. Hedge funds too may use P-Notes and sub accounts of FII to operate in stock market. Reserve Bank stance is towards prohibition of P-Notes.

6. Does not serve the Purpose of Real Sectors:
Capital Account Convertibility (CAC) primarily benefits industrialists and financial capitalists who invest in stock market for speculative gains. It is mainly pursued to please international organisations (IMF, WB, and WTO) and foreign investors. It hasn’t addressed the real problems of the country like poverty, unemployment, income inequalities, infrastructure bottlenecks and many more. The irony is that burden is borne by the common man under a crisis, which has become an actuality these days. This comes up in the form of sharper reduction in subsidies, less budgetary allocations for social welfare programmes, high taxes and high inflation. The foreign speculators and domestic players walk out of the market by converting their assets into cash and insulate themselves from losses in such during economic problems.

Key Points & Analysis:-

1. India adopted full currency convertibility on current account in 1992 and partial convertibility on Capital account in 1994. After that mainly because of major in-flows of foreign currency say US $ (as explained above in negative effects) the value of rupee is seen going on depreciating against US $ from 1976 to 2016 as shown in graph below:

2. Exchange Rate of Rupee against US $

3. A number of empirical studies does not find evidence that greater openness of capital account and higher flows of capital lead to advanced growth.

4. According to all the information and history above, ‘Convertibility of Indian Rupee’ has been a slow go matter. Two times since the
Liberalization in 1991, Mr. Tarapore committee was appointed to review on full convertibility on Capital account. The expected economic conditions and parameters which were mentioned by ‘Tarapore committee’ were not achieved and no one had taken the risk of going for full convertibility. 5. The pre-conditions suggested by Mr.Tarapore committee are very logical. Saying so, it’s true because there are many other countries which faced a substantial set back to their economy because of full convertibility on capital account by ignoring the economic conditions of their country. Hence after that, those countries were compelled to impose restrictions on transactions of foreign exchange in capital account. Let us understand the impact of full convertibility of currency when adopted blindly with the example of France as below-

* France followed a very gradual approach towards CAC during 1980s. In 1979, France joined the European Monetary System (EMS) while maintaining a relatively tight set of capital controls. Subsequent to the second oil price shock later in the year, France entered into a recessionary phase. The Government resorted to expansionary policies. The nationalization of the financial sector and the subsequent increase in the government control of the banking sector up to 85-90 per cent eroded the confidence of the markets resulting in considerable outflows. A series of speculative attacks on the exchange rate forced devaluation of French franc by over 25 % during 1981 to 1983. Capital controls were further tightened. Measures included prohibiting all forward transactions by importers and exporters and steps to prevent evasion by using leads and lags in current account transactions. However, controls failed to be effective especially with large external imbalances. Quantitative credit control mechanism was abolished in 1985. While this well-planned liberalization of financial sector was being implemented, France continued to maintain capital controls. When the French macro-economic situation strengthened, current account stabilized in 1984 and the financial sector was considered to be able to withstand foreign competition, capital controls were withdrawn gradually. The overall liberalisation process spanned over a period of 6 years –1984-1990. During 1986-87, there was some disruption in the forex market, which led to some realignment when the French franc was devalued by about 3 per cent. There were sizable increases in portfolio flows into France (from below 0.5 per cent of GDP in early 1980s to close to 4 per cent of GDP by late 1980s). Yet, the liberalisation efforts continued uninterrupted till 1990 when France adopted complete CAC. The French exchange rate was again tested by the markets during the 1992-93 EMS crises. It led to decisive interest rate hikes, heavy interventions and broadening of the EMS fluctuation margins, though the central rate of the French franc was not adjusted. There was no reversal with regard to capital account measures. Eventually, French franc joined the Euro on January 1, 1999. Notwithstanding the fact that peer pressure (in terms of the prospect of further European economic and financial integration) has been a major driving force behind French liberalisation of capital movements, the experience of France remains commendable with respect to its integrated approach to reform involving macroeconomic stabilisation and institutional strengthening. Deregulation of financial markets, abolition of quantitative credit controls, industrial policy reforms and discontinuation of subsidies were undertaken before adopting full CAC. The French approach to strengthen the domestic economy before liberalising the volatile items in the capital account was the key element behind the French attempt at CAC.

It shows how risky is to go for full convertibility without having strong base of balance of Payment, forex reserves, Inflation rate, domestic production and Non-performing assets to be at minimum.

6. Current account transactions are quite controllable and having narrow scope of impact on economy as shown in ‘current account’ graphical trend above which is showing high deficit but though did not have much damage to overall economy of country. So, having full convertibility on current account is helpful in controlling inflation rate mainly in recession.

7. Full capital account convertibility may lead to Black money investments in the economy which will have adverse effect on economy. Ex. P-Notes issued by foreign entities as explained above.

8. FDI in India has increased at constant rate consistently because of having restricted policy on capital account and obligations as per FEMA. Below Graph of trend of FDI since 1990 to 2015.

Conclusions and Recommendations:

1) It is wiser to go for full convertibility of Indian Rupee on capital account after strengthening the base of economy and should not be adopted blindly. With reference to Mr. Tarapore committee’s recommendations all the measures have to be taken else there is no reversal with regards to the capital account.

2) Exports should be promoted and import should be discouraged by Govt. and should keep tight watch on balance of payment.

3) The proper precaution has to be taken to cope up with the depreciation of Indian rupee after full convertibility and should be kept within control.

4) Actions has to be planned and tough decisions will be required to keep market situation stable as full convertibility will result in volatile Exchange Rates and inflows and out flows of currencies which is in other words can be called as currency war has to be taken into account. 5) Finally, Balance of Trade is one of important indicator in foreign exchange which is required to be maintained at a lower side further tending to Zero rather going for full convertibility on capital account for which India have to have better and strong economic performance in upcoming years. Below graph shows trend in Balance of Trade in US million $ since 1990 till now.

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Bibliography:-

Foreign Exchange- Practice, Concept & Control by C. Jeevanandam, Sultan Chand & Sons Publications. India and capital account convertibility-Research paper by Soamya Goel, Naresh kumar and T. P. Singh

Reserve Bank of India Occasional Papers Vol. 27, No. 1 and 2, summer and Monsoon.

www.tradingeconomics.com I Ministry of Commerce and Industry of India.

Various Financial Papers and Magazines.