Eco Project Mcom Sem 2

8/11/2019 Eco Project Mcom Sem 2

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CURRENCY CONVERTIBILITY

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INTRODUCTION

Indias development strategy was based on protection, self-reliance & import substitution before

the liberalization policy was accepted & initiated. Foreign capital flows were not looked upon

favorably & therefore not encouraged. If there is a deficit in the current account it was financed

mainly through deft flows & official development assistance. The policy followed was one which

discouraged foreign investment. However, the adverse balance of payment & the economic crisis

faced by India forced India to adopt economic reforms.

Government restrictions can often result in a currency with a low convertibility.

For example, a government with low reserves of hard foreign currency often restrict currency

convertibility because the government would not be in a position to intervene in the foreign

exchange market (i.e. revalue, devalue) to support their own currency if and when necessary.

Convertibility is the quality that allows money or other financial instruments to be converted into

other liquid stores of value. Convertibility is an important factor in international trade, where

instruments valued in differentcurrencies must be exchanged.

Currency Convertibility means the ability to freely exchange the currency of one Member State

into the currency of another Member State.

For example, a Barbadian should be able to easily purchase goods in a store in Port of Spain with

his Barbadian dollars and receive his change in Trinidad and Tobago dollars.
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However, this does not always happen because of the existence of two different exchange systems

in CARICOM Fixed and Floating. Currency convertibility implies the absence of exchange

controls or restrictions onforeign exchange transactions.

The ease with which a country's currency can be converted into gold or another

currency. Convertibility is extremely important for international commerce. When a currency in

inconvertible, it poses a risk and barrier to trade with foreigners who have no need for the

domestic currency.

Government restrictions can often result in a currency with a low convertibility.

For example, a government with low reserves of hard foreign currency often restrict currency

convertibility because the government would not be in a position to intervene in the foreign

exchange market (i.e. revalue, devalue) to support their own currency if and when necessary.

An international monetary system has been in existence since monies have been traded, its

analyses have been traditionally started from the late 19th century when the gold standard began

Convertibility essentially means the ability of residents and non-residents to exchange domestic

currency for foreign currency, without limit, whatever be the purpose of the transactions.

The Movement of Capital for the full functioning of the CSME depends to a large degree on two

conditions already pointed out in the Revised Treaty provisions

Abolishing exchange controls and

The free convertibility of currency within the CSME.


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MEANING & DEFINITION

The ease with which a country's currency can be converted into gold or another currency.

Convertibility is extremely important for international commerce. When a currency is

inconvertible, it poses a risk and barrier to trade with foreigners who have no need for the

domestic currency.

The ability toexchangemoney forgold or othercurrencies.Somegovernments which do not have

largereserves of hard currency foreign reserves try torestrict currency convertibility, since they

are not in a position to handle large currency market operations to support their currency when

necessary.

The state of or the ease with which acurrency may be exchanged for a foreign currency. Currency

convertibility is vitally important in theforeign exchangemarket;higher convertibility means that

a currency is moreliquid and, therefore, less difficult totrade.

Factors affecting convertibility include the availability of foreign currency reserves in a given

country and domestic regulations seeking to protect localinvestors from badinvestment decisions

in, say, a currency undergoing a period ofhyperinflation.

Currency convertibility refers to the freedom to convert the domestic currency into other

internationally accepted currencies and vice versa at market determined rates of exchange.

A few socialist governments evenissue inconvertible currencies, such as theCuban peso,in order

to protect their citizens from perceivedcapitalist infiltration.
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Currency Convertibility refers to the degree to which one currency can be exchanged for another.

Some currencies trade less freely on the open market and exchanges, in these cases, can be more

difficult to process.

Currency Convertibility is the ease with which a country's currency can be converted into gold or

another currency. Convertibility is extremely important for international commerce. When a

currency in inconvertible, it poses a risk and barrier to trade with foreigners who have no need for

the domestic currency.

Currency convertibility implies the absence of exchange controls or restrictions on foreign

exchange transactions.

Currency convertibility means the freedom to convert one currency into other internationally

accepted currencies. There are two popular categories of currency convertibility, namely :

Convertibility for current international transactions; and

Convertibility for international capital movements.

Currency convertibility implies the absence of exchange controls or restrictions on

foreign exchange transactions.


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ADVANTAGES

Encourages export: - Exporters are motivated to increase their exports since there is

possibility of making more profits under currency convertibility conditions. As a result of

convertibility on current account, higher profits will be earned since market exchange rate

will give higher returns as compared to the officially fixed exchange rate. From the given

exports, they earn more foreign exchange.

Encourage Import Substitution: - since the market determined exchange rate is higher

than the officially fixed exchange rate, imports become more expensive. This makes

countries to go in for import substitution.

Incentives to Send Remittances from Abroad:- Indian workers employed abroad & NRIs

find it convenient to send remittances of foreign exchange without hassle. This also

encouraged illegal remittances like hawala money & smuggling.

Self-adjusting Process in the Correction of Surplus or Deficits in Balance of

Payments:- In case, a country faces a deficit due to overvalued exchange rate, the currency

of the country will depreciate. This will encourage exports by lowering the prices &

discourages imports by raising their prices. In this manner the deficit or surplus in the BoP

gets corrected without the intervention of the government.


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Countries are Enabled to specialize in the Production of Goods for which they have a

Comparative Advantage:- each country will be able to engage in the production of goods

in accordance with their comparative advantage & resource endowments. When there is

currency convertibility, market exchange rate truly reflects the purchasing power of their

currencies which is based on the prices & costs of goods in different countries. In a

competitive environment, lower prices of goods which reflect the comparative advantage

will enable countries to increase exports. Thus currency convertibility will lead to

specialization & international trade on the basis of comparative advantage. This will be

beneficial for all countries in trade.

Integration of World Economy:- currency convertibility enables better integration of the

world economy. The easy availability of foreign exchange helps in the growth of trade &

increased capital flows between countries. This will enables the growth of all countries

which is important in the context of globalization.

It forces the financial sector to be become more efficient, more disciplined, and much

stronger

Since it exposes makes India more exposed to the vagaries of the international financial

sector, it forces the government to become more disciplined on the fiscal side of things.

It sends a signal to international investors as well as the financial world that India is

confident of itself herself in the economic and financial arena and has the capability to

withstand anything that is thrown at it her.

Since it exposes makes India more exposed to the vagaries of the international financial

sector, it forces the government to become more disciplined on the fiscal side of things.


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DISADVANTAGES

Currency convertibility can give rise to problems of inflation in domestic economy. The market

determined exchange rate is generally higher than the officially fixed exchange rate. This leads to

a rise in prices of essential imports which can results in a situation of cost push inflation in an

economy.

If the people monitoring is not done, convertibility can results in the depreciation of the domestic

currency. Undue depreciation of a currency can make people loose confidence in the currency

itself. This can adversely affect the trade & capital flows of a country.

Under capital account convertibility, a country is given the freedom to transact in financial assets

with foreign countries without restrictions. Such an arrangement is to enable increased investment

activities. But there are risks attached to it. A very likely possibility is that of capital flight at the

first sign of an internal economic problem.

The short-term capital flights termed as hot money transfers can destabilize an economy unless

precautionary or counter measures are taken to achieve stability.

Speculative activities may increase under free convertibility, making the exchange rates highly

volatile. Speculation can lead to depreciation of currencies & flight of capital. This is proved by

the experience of the South East Asian countries like Thailand, Malaysia, in the year 1997-199,

which experienced severe depreciation of currency & capital flight.

India is moving very cautiously towards capital account convertibility due to various risks which

can create macroeconomic imbalance in the in the economy. Though the rupee is not freely

convertible on the capital account, in certain transactions full convertibility prevails.


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For example, foreigners, non-resident Indians engaged in investing on portfolio or direct

investments are given freedom to bring in & repatriate their funds. It is felt that a strengthening of

the reserve position & structural strengthening will make India ready to adopt full convertibility on

the capital account.

It exposes the country India to the volatility of the world financial system. The rupee can possibly

become more volatile.

That said, there are infinitely more merits than demerits to going becoming convertible on the

capital account. The As far as the demerits are concerned, they are only demerits so only as long as

the financial system and government accounts are shoddy. If they it become world class financial

system, the it can easily manage volatility can be managed without any problem.


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EXTERNAL AND INTERNAL CONVERTIBILITY

When all holdings of the currency by non-residents are freely exchangeable into any foreign (non-

resident) currency at exchange rates within the official margins than that currency is said to be

externally convertible.

All payments that residents of the country are authorized to make to non-residents may be made in

any externally convertible currency that residents can buy in foreign exchange markets.

If there are no restrictions on the ability of a country to use their holdings of domestic currency to

acquire any foreign currency and hold it, or transfer it to any nonresident for any purpose, that

countrys currency is said to be internally convertible.

Thus external convertibility is the partial convertibility and total convertibility is the sum of

external and internal convertibility.


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TYPES OF CURRENCY CONVERTIBILITY

1.

CAPITAL ACCOUNT CONVERTIBILITY :-

Currency convertibility refers to the freedom to convert the domestic currency into other

internationally accepted currencies and vice versa. Convertibility in that sense is the obverse of

controls or restrictions on currency transactions. While current account convertibility refers to

freedom in respect of payments and transfers for current international transactions, capital

account convertibility (CAC) would mean freedom of currency conversion in relation to capital

transactions in terms of inflows and outflows. Article VIII of the International Monetary Fund

(IMF) puts an obligation on a member to avoid imposing restrictions on the making of payments

and transfers for current international transactions. Members may cooperate for the purpose of

making the exchange control regulations of members more effective. Article VI (3), however,

allows members to exercise such controls as are necessary to regulate international capital

movements, but not so as to restrict payments for current transactions or which would unduly

delay transfers of funds in settlement of commitments.

Advantages of CAC

More capital available to the country, and the cost of capital would decline.

The freedom to trade in financial assets.

Difficult for a country to follow unwise macroeconomic policies.

Tax levels would move closer to international levels .

It will grow competition among financial institutions.


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Disadvantages of CAC

It could lead to the export of domestic savings.

Expose the economy to larger macroeconomic instability.

Premature liberalization could initially stimulate capital inflows that would lead to

appreciation of real exchange rate and thereby destabilize an economy undergoing the

fragile process of transition and structural reform.

It may bring low quality investment .

It may generate the financial bubble.

2.CURRENT ACCOUNT CONVERTIBILITY :-

Current account convertibility allows residents to make and receive trade-related payments, i.e.

receive foreign currency for export of goods and services and pay foreign currency for import of

goods and services like travels, medical treatment and studies abroad. Current account

convertibility allows free inflows and outflows for all purposes other than for capital purposes

such as investments and loans. In other words, it allows residents to make and receive trade-related

payments -- receive dollars (or any other foreign currency) for export of goods and services and

pay dollars for import of goods and services, make sundry remittances, access foreign currency for

travel, studies abroad, medical treatment and gifts, etc.


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Current account convertibility refers to freedom in respect of Payments and transfers for current

international transactions. In other words, if Indians are allowed to buy only foreign goods and

services but restrictions remain on the purchase of assets abroad, it is only current account

convertibility. As of now, convertibility of the rupee into foreign currencies is almost wholly free

for current account i.e. in case of transactions such as trade, travel and tourism, education abroad

etc.

The government introduced a system of Partial Rupee Convertibility (PCR) (Current Account

Convertibility) on February 29,1992 as part of the Fiscal Budget for 1992-93. PCR is designed to

provide a powerful boost to export as well as to achieve as efficient import substitution. It is

designed to reduce the scope for bureaucratic controls, which contribute to delays and inefficiency.

Government liberalized the flow of foreign exchange to include items like amount of foreign

currency that can be procured for purpose like travel abroad, studying abroad, engaging the service

of foreign consultants etc. What it means that people are allowed to have access to foreign

currency for buying a whole range of consumables products and services

Current account convertibility is popularly defined as the freedom to buy or sell foreign exchange

for:-

a) The international transactions consisting of payments due in connection with foreign trade,

other current businesses including services and normal short-term banking and credit

facilities

b) Payments due as interest on loans and as net income from other investments

c) Payment of moderate amounts of amortization of loans for depreciation of direct

investments


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d) Moderate remittances for family living expenses

e) Authorized Dealers may also provide exchange facilities to their customers without prior

approval of the RBIbeyond specified indicative limits, provided, they are satisfied about

the bonafides of the application such as, business travel, participation in overseas

conferences/seminars, studies/ study tours abroad, medical treatment/check-up and

specialized apprenticeship training.


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NONCONVERTIBLE CURRENCY

Also known as a "blocked currency".

Any currency that is used primarily for domestic transactions and is not openly traded on a forex

market. This usually is a result of government restrictions, which prevent it from being exchanged

for foreign currencies.

As the name implies, it is virtually impossible to convert a nonconvertible currency into other legal

tender, except in limited amounts on the black market. When a nation's currency is nonconvertible

it tends to limit the country's participation in international trade as well as distort its balance of

trade.

A barrier to economic development arising from a nations inability to convert its currency on

foreign exchange markets, thus its inability to acquire the foreign capital it needs to achieve

improvements inproductivity,income and human welfare among its people.

Almost all nations allow for some method of currency conversion; Cuba and North Korea are the

exceptions.

They neither participate in the international FOREX market nor allow conversion of their

currencies by individuals or companies. As a result, these currencies are known as blocked

currencies; the North Korean won and the Cuban national peso cannot be accurately valued against

other currencies and are only used for domestic purposes and debts.
http://welkerswikinomics.com/blog/glossary/foreign-exchange-market/http://welkerswikinomics.com/blog/glossary/capital/http://welkerswikinomics.com/blog/glossary/productivity/http://welkerswikinomics.com/blog/glossary/income/http://welkerswikinomics.com/blog/glossary/income/http://welkerswikinomics.com/blog/glossary/productivity/http://welkerswikinomics.com/blog/glossary/capital/http://welkerswikinomics.com/blog/glossary/foreign-exchange-market/


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Such nonconvertible currencies present a major obstruction to international trade for companies

who reside in these countries.

Convertibility is the quality of paper money substitutes which entitles the holder to redeem them

on demand into money proper.


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HOW IT WORKS IN INDIA?

Capital and current account convertibility in pretext to Indian economy.

The Committee, chaired by former RBI governor S S Tara pore, was set up by the Reserve

Bank of India in consultation with the Government of India to revisit the subject of fuller

capital account convertibility in the context of the progress in economic reforms, the

stability of the external and financial sectors, accelerated growth and global integration.

Reserve Bank of India, and will have the following terms of reference:

Undertake a review of the extant regulations that straddle current and capital accounts,

especially items in one account that have implication for the other account, and iron out

inconsistencies in such regulations.

Examine existing repatriation/surrender requirements in the context of current account

convertibility and management of capital account.

Identify areas where streamlining and simplification of procedure is possible and remove

the operational impediments, especially in respect of the ease with which transactions at

the level of authorized entities are conducted, so as to make liberalization more

meaningful.

Ensure that guidelines and regulations are consistent with regulatory intent.

Review the delegation of powers on foreign exchange regulations between Central Office

and Regional offices of the RBI and examine, selectively, the efficacy in the functioning of

the delegation of powers by RBI to Authorized Dealers (banks).


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RUPEE CONVERTIBILITY

Convertibility of a currency implies that a currency can be transferred into another currency

without any limitations or any control. A currency is said to be fully convertible, if it can be

converted into some other currency at the market price of that currency. Convertibility can be

related as the extent to which a country's regulations allow free flow of money into and outside the

country.

For instance, in the case of India till 1990, one had to get permission from the Government or

RBI as the case may be to procure foreign currency, say US Dollars, for any purpose. Be it import

of raw material, travel abroad, procuring books or paying fees for a ward who pursues higher

studies abroad. Similarly, any exporter who exports goods or services and brings foreign currency

into the country has to surrender the foreign exchange to RBI and get it converted at a rate pre-

determined by RBI.

At present, Indian rupee is partly convertible on current Account. That is convertibility in the case

of transactions relating to exchange of goods and services, money transfer.

In 1997, the Tara pore committee on capital Account convertibility was constituted by the Reserve

Bank. This committee indicated three preconditions for capital Account convertibility, they are

Fiscal consolidation, a mandated inflation target, strengthening of the financial system.

During March 2006, Prime Minister said that India is moving towards fuller capital account

convertibility. In response to this the Reserve Bank of India set up the Tara pore Committee to

work out another roadmap for current account convertibility.


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Full currency convertibility of the Indian rupee means, can travel abroad and buy dollars over the

counters, currency convertibility refers to the absence of any restriction on the holding of foreign

currency by residents and of the national currency by foreigners, and on free conversion between

currencies. Can incur expenses abroad using the credit card and pay for the dollars (or pounds, or

euros) expanded in rupees.

This helps to invest in specified foreign shares and mutual funds. And also it attracts many foreign

tourists, which can be contributed to the GDP.

Therefore, fuller convertibility of Indian rupee helps to attract FDI and also helps Indian's to invest

abroad.

After the economic liberalization process started in India in 1991, a Liberalised Exchange Rate

Mechanism was introduced in 1992.This allowed partial convertibility of Indian rupee, thus

introducing dual exchange rate. After that full convertibility on trade account started from 1993.It

was followed by Full convertibility on current account from 1994.However after the Mexico crisis

in early 1990s or the mammoth East Asia Crisis where there was sudden flow of capital

internationally debilitating the economies of the involved nations, India was reluctant to adopt

capital account convertibility.

However the Tara pore committee, appointed in 1997, recommended phased implementation of

capital account convertibility with certain prerequisites like fiscal deficit to be 3.5% of GDP,CRR

to be brought down to 3%, gross NPA of public sector banks to be 5% of the total assets, inflation

rate to be around 3.5%.The committee was reappointed almost a decade later and submitted almost

the same recommendations with some modifications.


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It must be remembered that the movement towards fuller CAC should be a process and not an

event. Macroeconomic stability is a must before achieving full CAC. Any adhoc arrangement from

the fixed regime maintained for a long period of time might disturb the foreign exchange market

and disrupt the economic progress.

At present, Indian rupee is partly convertible on current Account. That is convertibility in the case

of transactions relating to exchange of goods and services, money transfer.

Convertibility of rupees is known as freedom of exchange of rupee with other all international

currency. It means that rupee can covert in USA dollars more easily and USA dollars can convert

in Indian currency for buying and selling of goods and services. after study everything, I am

writing, "it is conspiracy to lower the value of Indian currency that in real sense. In 1996, there

were just Rs. 38 for every one dollar but after liberalized convertibility of rupee, one dollar

exchange rate has reached up to Rs. 45 in 17th Jan. 2011. When convertibility of Rupee was

started, it was claimed that our export will increase because our Indian companies will easy to

trade in foreign country due to easy exchange without any govt. restriction. But, it opens doors for

importing useless things and moreover it is very sad for India that gold is not make as standard

exchange currency. China is smart than India,under his new foreign exchange policy,convert all

his foreign exchange in gold. Now, his Chinese yuan is equal to Indian Rs. 6.89.
http://www.svtuition.org/2010/04/foreign-exchange-policy-of-china.htmlhttp://www.svtuition.org/2010/04/foreign-exchange-policy-of-china.htmlhttp://www.svtuition.org/2010/04/foreign-exchange-policy-of-china.htmlhttp://www.svtuition.org/2010/04/foreign-exchange-policy-of-china.html


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RUPEE AS A CONVERTIBLE CURRENCY:-

The recent decision of the government to have full convertibility of the Indian Rupee which will

affect everyone in the country but is remotely understandable by a few, is one such important

decision, which is designed to please the international financial institutions and the 10 percent of

the population of India who are either rich or of upper middle class.

It is essential to judge a policy by examining both the costs and benefits of it. The government is

talking about the illusory benefits of this convertibility, which will basically remove all obstacle to

the free flow of money and as a result goods and services also can move freely.

The government, in a fully convertible regime, will not be able to control these flows directly.

Indirect controls will be implemented by changing interest rates and taxes but the effectiveness of

this control according to the international experiences is uncertain.


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HISTORY OF RUPEE CONVERTIBILITY

Up to 1991, when India faced a major foreign exchange crisis, there had been very rigid

controls on both the capital account as well as the current account.

Current account convertibility was introduced in India in August 1994.

After start of liberalization in1991, India had accepted the IMF rules for currency reforms.

In 1997 the government had set up a committee (Tarapore committee) to spell out a road

map for the full convertibility of the rupee.

Committee suggested three phases of adopting full convertibility of rupee in capital

account.

First phase in 2006 -2007

Second phase in 2007-2009

Third phase in 2009- 2011


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ADVANTAGES OF RUPEE CONVERTIBILITY

The benefits of free flows of money in a fully convertible regime means foreigners would be able

to invest in the Indian stock markets, buy up companies and property including land (unless there

are restrictions).

Indian people and companies can import anything they would like, buy shares of foreign

companies and property in foreign lands and can transfer money as they please without going

through the Hawala business.

Indians who have not paid their taxes or repaid their loans taken from the Indian banks will be

free to transfer their money to foreign countries outside the jurisdiction of the Indian authority.

The expected benefits for India would depend on the attractiveness of the country as a safe

destination for short-term investments. Long-term investments do not depend on convertibility.

China has no convertibility, instead a fixed exchange rate for the last 12 years. Yet, China is the

most important destination for long-term foreign investments. Thus, discussions about the full

convertibility should be about the desirability of short-term investments and their implications.

Short term investments i.e., foreign investments in shares and bonds of the Indian companies and

Indian government depend on the demonstration of profit of the Indian companies and the

continuous good health of the Indian economy in terms of low budget deficits, low balance of

payments deficits, low level of government borrowings and low level of non-performing loan in

the Indian banking system.


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From these points of view India cannot be a very attractive destination as the health of the

economy despite of the propaganda of the Indian government is very weak with huge government

debt, revenue deficits, Rs.150,000 Crores of uncollected taxes and Rs.120,000 Crores of unpaid

loans in the banks, increasing price of petroleum and increasing balance of payments deficits of

the country. With 80 percent of people live on less than 2 dollars a day, and 70 percent of the

people live on less than 1 dollar a day, profitable market in India is also very small. If the Indian

companies working under these constraints cannot demonstrate good and continuous profit, short-

term investments will fly out very easily if there is any sign of economic downturn when there is a

fully convertible Rupee. The result will be further increase in the balance of payments deficits and

fall of the exchange rate of Rupee, which will provoke Indians to take their money out of India.

Another advantage of full convertibility of Rupee for the Indian rich is that they can import as they

like and buy properties abroad as they were allowed to do so during the days of British Raj. It has

certain advantages for the Indian companies who will be able to import both raw materials and

machineries or set up foreign establishments at will.


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DISADVANTAGES OF RUPEE CONVERTIBILITY

Full convertibility also has adverse consequences for the Indias domestic producers of these raw

materials and machineries, as they have to compete against foreign suppliers who like Chinese

may have deliberate low rate of exchange for their currencies thus making their goods low in

price. Foreign suppliers also can be supported by all kinds of subsidies by their government so as

to make their prices very low. Agricultural exports from Europe, USA, Thailand, and Australia can

ruin Indias own agriculture.

There are many such historical examples in India. Within 20 years between 1860 and 1880, Indias

domestic manufacturing industries were wiped out by free trade and convertible Rupee during the

days of British Raj. Indian farmers during those days could not cultivate their lands, as the

imported food products were cheaper than whatever they could produce. Demonstration of wealth

by the Nawabs and Maharajas of India in Paris and London during the days of British Raj has not

done any good for starving millions of India but was responsible for massive misuse of Indias

foreign currency reserve created by the sweat and blood of the Indias poor in those days. Full

convertibility of Rupee and free trade may bring back those dark days.

The freedom for Indias rich to buy companies and property abroad may lead to massive diversion

of funds from investments in the home economy of India to investments abroad. This would

amount to export of jobs to foreign countries creating more and more unemployment at home.

Japan in recent years suffers from this phenomenon, where increasingly Japanese companies are

transferring funds to China for investments, taking advantage of the very low wage rate and low

exchange rate of Yuan, thus creating unemployment at home. Although China has massive surplus

in the balance of payments, huge reserve of dollars and gigantic flows of foreign investments, a


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non-convertible Yuan and controls on transfer of money have kept Chinas exchange rate low

enough so that Chinese goods can capture the markets of every important country of the world.

The most dangerous consequence of convertibility is that Rupee will be under the control of

currency speculators. A fully convertible regime for the Rupee will certainly include participation

of Rupee in the international currency market and in the future market of Rupee, the playground

for the international speculators. It is very much possible for the speculators to buy massive

amount of Rupee to drive up its exchange Rate.


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Page 26

PARTIAL CONVERTIBILITY OF RUPEE

Partial convertibility of Rupee was started in 1992 for current account. In simple word, there is no

control of Indian currency official. Any foreign company can do business and can go to his

country with this profit after exchanging all Indian currency in their foreign currency. For

example, According to its Directors Report, a public document filed with Indias Registrar of

Companies, Google India Private Ltd reported revenues of Rs. 779.34 crore (around $172.03

million at current rates), over the 15 month periodfrom Jan 2009 to March 2010. For the same

period, it reported a profit after tax of 97.96 crore ($21.62 million), and received foreign exchange

of Rs. 666.25 crore, with a foreign exchange out go of Rs. 304.24 crore. In this, example, we see

that there is no our control our one foreign currency. From economic point of view, if any country

has largest amount of other countries currency, that country will become economically sound.

Suppose, if India has not USA dollars for exchanging Rs. 304.24 crore to Google India Pvt. Ltd, at

that time, India has to take loan of same USA Dollars from USA and will pay interest on it. So, it

will increase adverse balance of payment.

It is true, with partial convertibility of Rupees, investment in foreign country has become easy but

it is also harmful for India, because same investment should be in India instead any other country.

All companies think the benefit of their residential country from where they are operating their

business. So, for India's interest, we have to make some strict rules for stopping outflow of fund on

the name of convertibility of rupee or liberalization.


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Page 27

The rupee has arrived. Long before the domestic currency gets the `convertible tag, its being

freely accepted and exchanged in Singapore, Malaysia, Indonesia, Hong Kong, Sri Lanka and

other countries. Till now, such transactions were confined to select departmental stores which are

favourite of Indian tourists; now more and more shops, hotels and even money changers are

willing to accept the local legal tender.

This means no double conversions, and therefore, extra cost while exchanging Indian rupees. This

may not be quite legal since in the international money market, the rupee is still not a deliverable

currency. Nonetheless, its acceptance is on the rise, thanks to growing trade with India and a surge

in tourist inflows.

It has certainly made things easier for the Indian tourists who can simply carry rupees, and do

away with travelers cheques. In most Asian countries, the nearest `money exchange shop will

give them the local currency against rupees. Many feel the trend has picked with hints that

convertibility may be matter of time.

Travel agents, in India, say that since many Indians are travelling abroad, especially to Asian

countries, many banks and foreign exchange agents abroad have started accepting Indian rupees.

Tarmo Wong, a manager with `money exchange shop in one of the biggest hotels in Singapore,

said, We have orders to accept the Rs 500 and Rs 1,000 bills. We have been doing this for almost

6-8 months now. Some of the `money changers in Singapore have a similar view.

Interestingly, in the small, but growing parallel market, the conversion rates have become finer for

the Indian traveler or the business tourist. Earlier, a handful of outfits accepted the Indian rupee

and usually the buy/sell spread was high.


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Page 28

Most travelers (even today) convert their rupees in US dollars in India and then exchange them

again in local currencies of countries they visit. The cost of such double conversion could be as

high as 5%. Prakash Dagia, a regular business traveler to countries like Indonesia, Bangladesh and

Malaysia, said, In the past few months, the rupee has gained acceptance in almost all countries in

Asia. The best part is you can exchange it back to Indian rupees when youre flying back to India.

Full currency convertibility of the Indian rupee means that you can travel abroad and buy dollars

you need over the counter. Partial currency convertibility already exists in the system. For

instance, you can spend through your credit card and pay the money spent in foreign currency

back in India in Indian rupees. Currency convertibility refers to the absence of any restriction on

the holding of foreign currencies by residents and of the national currency by foreigners, and on

free conversion between currencies. It does not preclude restrictions on the type and quantity of

non-currency assets that residents can hold abroad or foreigners can hold in the country.


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Page 29

FULL CONVERTIBILITY OF RUPEE

The Prime Minister, Dr. Manmohan Singh in a speech at the Reserve Bank of India, Mumbai, on

March 18, 2006 referred to the need to revisit the subject of capital account convertibility. To

quote:

Given the changes that have taken place over the last two decades, there is merit in moving

towards fuller capital account convertibility within a transparent frameworkI will therefore

request the Finance Minister and the Reserve Bank to revisit the subject and come out with a

roadmap based on current realities.

Convertible currencies are defined as currencies that are readily bought, sold, and converted

without the need for permission from a central bank or government entity. Most major currencies

are fully convertible; that is, they can be traded freely without restriction and with no permission

required. The easy convertibility of currency is a relatively recent development and is in part

attributable to the growth of the international trading markets and the FOREX markets in

particular. Historically, movement away from the gold exchange standard once in common usage

has led to more and more convertible currencies becoming available on the market. Because the

value of currencies is established in comparison to each other, rather than measured against a real

commodity like gold or silver, the ready trade of currencies can offer investors an opportunity for

profit.


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Page 30

The U.S. dollar is an example of a fully convertible currency. There are no restrictions or

limitations on the amount of dollars that can be traded on the international market, and the U.S.

Government does not artificially impose a fixed value or minimum value on the dollar in

international trade. For this reason, dollars are one of the major currencies traded in the FOREX

market.

Although the Minister of Finance had indicated during his presentation of the 1992-93 Budget that

full convertibility of the rupee would be introduced in a span of 3 or 4 years, full convertibility

was announced much earlier and in fact it is the highlight of the 1993-94 Budget.

There is, however, a subtle difference in the full convertibility of the rupee introduced in India and

the concept of full convertibility prevailing in developed countries like the U.K., U.S.A. etc. In

developed countries, full convertibility means that their currency is freely convertible anywhere in

the world. Their home currency can be converted into foreign currency without any restriction.

One does not have to disclose even the purpose of such conversion. For instance, U.S. Dollars can

be changed into Sterling Pounds in New York, Japanese Yen could be exchanged to Deutsche

Marks in Frankfurt, Australian Dollars can be converted into Candian Dollars in Adelaide etc.,

The exchange rate is controlled by the position of supply and demand in the market.

The full convertibility announced in the Union Budget of 1993-94, however, allows convertibility

only in the current account, which means the amount received by way of sale proceeds of exports,

paid for imports and the remittance by NRIs etc., alone are convertible at market determined rates.


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Page 31

In the last year's Budget, a dual exchange rate was announced i.e., 60% at market rates and 40% at

the official rate. In the current Budget, the dual exchange rate has become a unified exchange rate

which is a 100% conversion of foreign exchange at market rate. This is described as Full

Convertibility. This does not mean that one can get any amount of foreign exchange at market rate

for meeting any of one's needs. The Reserve Bank of India will permit sale of foreign exchange

currency to anyone only for those purposes which are stipulated by the Govt. of India. It does not

permit conversion of one's savings in the country for investment in foreign countries, as could be

done by the citizens of developed countries like the U.K. or U.S.A. For instance, if a citizen

resident in India wishes to undertake a foreign travel, the exchange for such travel can be had only

as per the norms prescribed by the Govt. under the Foreign Travel Scheme. Full convertibility of

the Rupee we have adopted for our country is tied up with exchange controls and restriction

envisaged by the provisions of the F.E.R. Act 1973 as amended.

Full convertibility has been introduced only as a measure of reforms to revitalize the economy of

our country and to bring it on to the path of liberalization. The New Economic Policy ushered in

by out Govt. is with a view to take India forward from a control-ridden-inward-looking economy

into a market - friendly, forward looking progressive and dynamic economy. Full convertibility of

the rupee, lower Customs and Central Excise duties, relaxation of Import / Export restrictions,

streamlining of procedural rules governing taxations, streamlining of procedural rules governing

taxation laws etc.,. have opened out our economy with a view to expansion and globalisation of

our trading activities. These are measures taken to move India forward in her march towards

economic freedom.


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CONCLUSION

The volatile nature of capital inflow presents an alarming trend. Liberalizing capital control may

lead to huge dependence on foreign portfolio capital. Need is to channelize the capital flow.

As recognized in the recent Tara pore Committee Report, financial institutions ability to identify,

measure, and manage risk will also depend on the availability of instruments to manage risk, the

liquidity of financial markets and the quality of market infrastructure, and level of market

discipline. Key segments of the Indian capital markets remain, however, underdeveloped. The

term money market is limited and although there is a domestic yield curve for government

securities with maturities up to 30 years, its depth and liquidity are limited.

The Govt. had however stated that if the value of the rupee depreciates to an unreasonable level in

the free market operations, the R.B.I. will intervene and control it. This assurances certainly gives

credence to the earnestness and sincerity with which the full convertibility has been announced.

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