Download - Final ppt currency-convertibility
Currency Convertibility
CURRENCY CONVERTIBILITY• What it is ? 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.
• Types Of Currency Convertibility. Fully convertible currency.
Partially convertible currency. Non-convertible currency.
RupeeConvertibility
CURRENT ACCOUNT• Transactions relating to: - Exchange of goods and services - Money transfers - Transactions that are classified in the Current
Accounts.• In Short, Current account includes all transactions,
which give rise to or use of our National Income.
CURRENT ACCOUNT TRANSACTIONS
• All imports and exports of merchandise.
• Invisible Exports and Imports (sale/purchase of services)
• Inward private remittances (to & fro)
• Pension payments (to & fro)
• Government Grants (both ways)
CURRENT ACCOUNT CONVERTIBILITY
• Indian scenario - fully convertible.
• Full freedom to both residents and non-residents.
• RBI has placed a cap in creation of a capital asset
• Freedom in respect of payments and transfers for current international transactions.
CAPITAL ACCOUNT
• Inflows and Outflows of capital.
• Borrowing from or Lending to aboard.
• Sales and Purchase of securities aboard.
CAPITAL ACCOUNT TRANSACTIONS
• Capital Direct Foreign Investments.
• Investment in securities.
• Other Investments.
• Government Loans.
• Short-term investments.
Portfolio Investment .
Stocks, Bonds, Bank Loans, Derivatives.
DirectInvestment.
Real estateProduction facilitiesEquity investment.
Other investment.
Holdings in loans Bank accounts Currencies
Capital Account Transaction’s Classification
CAPITAL ACCOUNT CONVERTIBILITY
• Floating Exchange Rate.
• What is means? – Freedom of Conversion• CAC allows anyone to freely move from local currency into
foreign currency and back. • Changes of ownership in foreign/domestic financial assets
and liabilities.
• Advantages !
CURRENTLY RESTRICTIONS : CAPITAL ACCOUNT
• Limits to companies borrowing abroad.• Restriction on foreigner investing in India.• Restriction on amount that FII can hold.• Purchasing a company is allowed but limit exit on
the amount that can be send.• Global Diversification of household portfolio is
practically non-existent.
LIMITS TO PARTIAL CAC Limits specified by the RBI:-
• Private visit
• Business travel
• Gift or donation
• Employment /For studies abroad
• Investment : Foreign stock markets
• Borrowings
REASONS FAVORING FINANCIAL OPENNESS & CAC
• Diversification
• NRI Remittances
• Foreign Investment in
• Catalyst for financial market, institutional development, competition, new technologies & discipline macro-economic policies.
• Reduction in the size of Black money.
• Induces competition against Indian finance.
REASONS FAVORING RESTRICTIONS
• Good times- More inflow; Bad times- More outflow.• Misallocation of Capital inflows.• Export of domestic Savings.• Entry of Foreign banks can create Unequal
playing field.• Highly volatile international finance (hot money)-
Higher speculation.
TARAPORE COMMITTEE
• Pre-Conditions
Gross fiscal deficit to GDP ratio to come down from a 4.5 %n 1997-98 to 3.5% in 1999-00.
A consolidated sinking fund has to be set up to meet government's debt repayment needs; financed by RBI.
Inflation rate to be at 3-5 per cent for the 3-year period 1997-2000 .
Gross NPAs of the public sector banking system needs to be brought down.
Average effective CRR needs to be brought down from the current 9.3% to 3% .
RBI should have a Monitoring Exchange Rate Band of plus minus 5% around a neutral .
Real Effective Exchange Rate RBI should be transparent about the changes in REER .
External sector policies should be designed to increase current receipts to GDP ratio .
Four indicators should be used for evaluating adequacy of foreign exchange reserves to safeguard against any contingency.
Contd...
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