Currency Conertibility
Current account convertible fully
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.
The current account of the balance of payments is the sum of the balance of trade (exports minus imports of goods and services), net factor income (such as interest
and dividends) and net transfer payments (such as foreign aid).
A current account surplus increases a countrys net foreign assets by the corresponding amount, and a current account deficit does the reverse.
A deficit on the current account = A surplus in the capital account or in the other case,A surplus on the current account = A deficit on the capital account
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.
Component of the current account in India’s BOP statement includes services (travel,transportation,Insurance,government expenditures and transfers.
Capital account convertible partially
RBI has defined Capital account convertibility(CAC) as the freedom to convert local financial assets in to foreign financial assets and vice versa at market determined rates of exchange without any sort of intermediation and regulation.
Capital account is divided in to 3 parts :-
1) Private Capital — Long term & Short term capital. Long term private capital includes Foreign investments both direct & portfolio, long term loans, foreign currency deposits, estimated portion of the unclassified receipts to
the capital account.
2) Banking Capital — covers movements in the external financial assets and liabilities of commercial and