con of rupees

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CONVERTIBILITY OF RUPEES

Prepared by

Ashutosh SinghRakesh Singh

Saurabh SinghRajesh Kamuni

Nanda Kumar


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BALANCE OF PAYMENTS (BOP)

Balance of Payment refers to the statement of accounts recording, all economic transactions of acountry with rest of the world.

Also, BoP is known as Statements of Accounts of these receipts.

Economic Transactions in BoP:

1) Visible Items (Eg. Goods)2) Invisible Items (Eg. Services)3) Capital Transfers (Eg. Transfer of Assets)

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CATEGORIES

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Convertibilityof Rupees

Current Account

Capital Account


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COMPONENTS OF CURRENT ACCOUNT

Unilateral Transfers:Compensation of employees covers wages,salaries, and other benefits, in cash or in kind, andincludes those of border, seasonal, and other non-resident workers.

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GOVERNMENT INITIATIONS

After Liberalization, in the year 1992, IndianFinance Minister Dr.Manmohan Singh allowedcurrent account convertibility of rupees.The exporters and importers were allowed freeconversion of rupees.

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PARTIAL RUPEE CONVERTIBILITY

The government introduced a system of PartialRupee Convertibility (PCR) (i.e. convertibility onlyin Current Account Convertibility not in capital) onFebruary 29,1992 as part of the Fiscal Budget for 1992-93.PCR is designed to provide a powerful boost toexport as well as to achieve as efficient importsubstitution.

It is designed to reduce the scope for bureaucraticcontrols, which contribute to delays and inefficiency.

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PARTIAL RUPEE CONVERTIBILITY

Government liberalized the flow of foreignexchange to include items like amount of foreigncurrency that can be procured for purpose liketravel abroad, studying abroad, engaging theservice of foreign consultants, etc.Because of this PCR we have imported cars,consumer goods, like Ferrari, Porsche cars, etc.

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CURRENT ACCOUNT - P RESENT S CENARIO

Indian scenario - fully convertible.Full freedom to both residents and non-

residents.Freedom in respect of payments andtransfers for current internationaltransactions.

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CAPITAL ACCOUNT

Capital Accounts is that account which records allsuch transactions between residents of a country andrest of the world which cause a change in asset orliabilities status of the residents of a country or itsgovernment.Components of Capital Account:

1) Foreign Investments2) Loans

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COMPONENTS OF CAPITAL ACCOUNT

Foreign Investments:FDI: Purchase of assets in rest of world whichallows control over the assets.

Portfolio Investments: Purchase of assets in restof world without any control over the assets.o Loans:

Commercial Borrowings: It refers to borrowings

by a country from the international money market.

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COMPONENTS OF CAPITAL ACCOUNT

Borrowing from external Assistance: Borrowing

by a country with consideration of assistanceBanking Capital Transactions: Transactions of external financial assets and liability of commercialbanks and co-operative banks operating as

authorized dealers in foreign exchange

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CAPITAL ACCOUNT CONVERTIBILITY

Thus, Indians could convert their rupees intodollars and use it in the US if there was capitalaccount convertibility here.

However full CAC is not allowed in India and thegovernment has its own rules and policies toregulate foreign investments.

This would lead to an irrational demand for dollarand would cause a free fall in the value of theIndian Rupee, thereby detrimentally affecting theeconomy.

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TARAPORE COMMITTEE

In 1997 the government had set up a committee(Tarapore committee) to spell out a road map for the fullconvertibility of the rupee.Under the Tarapore Committee recommendations, thiswas possible only when the following conditions weresatisfied:

The average rate of inflation should vary between 3% to5% during the debt-servicing time.

Decreasing the gross fiscal deficit to the GDP ratio by3.5% in 1999-2000.

Non-performing assets (NPAs) need to be brought down to5% Cash Reserve Ratio (CRR) needs to be reduced to 3% A monetary exchange rate band of plus minus 5% should

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DISADVANTAGES OF FULL CAC

Frequent inflow and outflow of capital resulting intodestabilizing of the economy if it is not robust towithstand such fluctuations.

Example: East Asian financial crisis of late 1990 s .o An open capital account can lead to the export of

domestic savings o Under the threat of a crisis, the domestic savings

too might leave the country along with the foreigninvestments, thereby rendering the governmenthelpless to counter the threat.

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