Path way to Rupee Convertibility

Path way to Rupee Convertibility

Rupee Convertibility

Convertibility essentially means the ability of residents and nonresidents to exchange domestic currency for foreign currency without limit , what ever be the purpose of the transaction

Current account convertibility implies there will be no restriction imposed on the making of payments & transfer for current international settlement i.e any one whether

Domestic importers or foreign exporters should be able to exchange domestic money for foreign currency to settle current account international transaction involving purchase of goods and services from abroad Capital Account Convertibility implies the movement of goods and services without restrictions ( as regards to capital account transaction )

If the currency cannot be converted into another foreign currency without prior government authorization we call it exchange control

Exchange Control

Exchange Control was first imposed in September 1939 in India Control Imposed on all foreign exchange receipts

and payments In 1991 there was acute shortage of forex

reserves Govt devalued rupee by 18% against US dollar

Exim scrip scheme Exporters were allowed to freely import up to 30% to 40 % of the export earnings but because of operational and other problem this scheme was abolished

In March 1st 1992 , LERMS Liberalized Exchange Rate Management System was introduced . This system entailed transfer of 40% of forex receipts (on current account transaction) at RBI effectual rate and remaining 60% at the market exchange rate

During this period forex market was stable and spread between official and market was maximum 17%.

Then came the era of exchange rate determined by the market ie system was unified

Then procedures was simplified and deregulated Greater autonomy to authorized dealers

Since 1993 budget foreign exchange for all permitted imports , payment of dividends to NRI Share holders , payment of all permitted interest on approved foreign borrowings is freely available in market determined rates.

In March 1994 RBI announced liberalization in the areas of release of foreign exchange for personal travel abroad , remittance on account of gift / donations etc

How ever prior approval of Govt and RBI is necessary for borrowing abroad , placing funds abroad , acquisitions of assets abroad joint ventures . This means restriction on capital account

From controlled currency to partly convertibility in (current account)

Should we open up Capital Account First Improve upon BOP Make Macro economic stability good Very efficient domestic financial market free

from administrative restriction is a pre requisite for introduction of capital account convertibility

Strengthen domestic capital market, control inflation , fiscal deficit bring down, inflation rate and strengthen forex reserves