| In a significant move the Centre has decided | | | | Indian economic agents exploit the |
| to come up with a greater Capital Account | | | | opportunities around the world.Risk of |
| Convertibility (CAS) of the Indian currency | | | | Foreign portfolio CapitalHowever the full |
| in a few days. The central bank has also | | | | convertibility poses major challenges as |
| appointed a six-person committee to produce a | | | | well. The flow of capital into India are |
| "road map" toward that goal by July 31.What | | | | generally of three types, VIZ, portfolio |
| is Capital Account Convertibility ?The | | | | equity, direct investment and loan capital |
| Capital Account Convertibility, (CAS) of the | | | | (both long term and short term).These |
| Indian Currency means, removal of | | | | different type of foreign capital flow have |
| restrictions on cross border movement of | | | | varying impact on balance of payment, capital |
| capital, no matter whether from India to rest | | | | market and the financial sector of our |
| of the world or the vise-versa. The formal | | | | country .The port folio capital which is |
| regime of capital account convertibility, | | | | coming in to our country by the way of |
| when in place , will allow all residents, | | | | investments in equities and bonds floats in |
| including companies or individuals or other | | | | the stock market. Portfolio capital flows |
| entities, to invest , divest or transect in | | | | could increase to more significant levels in |
| any property or asserts/liability of any | | | | the future as India's financial market would |
| country. One could convert one currency to | | | | integrated globally in convertibility |
| another or move funds anywhere in the world, | | | | regime.Foreign portfolio investors generally |
| according to one's personal choice, which | | | | enjoys freedom in regard to entry and exit. |
| will be unrestricted by law of the land.Pre | | | | It has been observed that portfolio capital |
| Conditions for Capital Account | | | | is fickle and is subject to sudden outflow, |
| ConvertibilityThe RBI had appointed the | | | | if the market conditions turns adverse or the |
| Tarapore committee to make recommendations on | | | | economy is on a down slide and then it will |
| making the rupee fully convertible. The panel | | | | become possible for the investors, both |
| had submitted its report in 1997. The panel | | | | Indian and foreign to exit the rupee and the |
| had recommended a three year time frame for | | | | currency could take a tumble. Such capital |
| complete convertibility by 1999-2000 subject | | | | outflows put unnecessary pressure on the |
| to satisfying certain conditions These pre | | | | exchange rate and money supply management |
| conditions includes(1) Bringing down gross | | | | policy. A small crisis could trigger a big |
| fiscal deficit to GDP ratio to 3.5% in | | | | collapse.Among the three major types of |
| 1999-2000, | | | | inflow, the advantage of FDI is clear as such |
| | | | flows can be directed in the desired areas as |
| (2) The inflation rate should remain at | | | | per the defined policy of the country. These |
| average 3-5% for the above three year period. | | | | flows are not volatile and therefore don't |
| | | | lead to unstable exchange rates. But |
| (3) Designing external sector policies to | | | | unfortunately the flow of FDI into India is |
| increase current receipt to GDP ratio and | | | | not adequate in comparison to other Asian |
| bringing down the debt servicing ratio from | | | | Countries.There is need for careful |
| 25% to 20%. | | | | monitoring of the inflows and their end-use |
| | | | and Government should keep options open to |
| (4) The gross NPAs of the public sector | | | | impose some restriction if the currency |
| banking system needs to be brought down to 5% | | | | conditions turn adverse, otherwise, Indian |
| by 2000 and the CRR to brought down to 3%.The | | | | could invite trouble like the East Asian and |
| Present scenarioThe economic conditions | | | | Latin American countries.Is Indian banking |
| stands now are, the gross fiscal deficit is | | | | sector prepared for "CAC"Free and full float |
| 4.1% and estimated to come down to 3.8% of | | | | of rupees is expected to put a lot of |
| GDP in the next fiscal. The WPI- based | | | | pressure on Indian banks to improve their |
| inflation rates hanging over 4% so far in | | | | efficiency levels. In the full convertibility |
| this fiscal. The current account deficit is | | | | regime Indian banks will accept deposits in |
| below 3% and foreign debt is lower by $1, 61, | | | | any currency from anywhere in the world. The |
| 030 million (foreign debt was $124,326 | | | | crucial determinant will be the usual "swap |
| million on Sept 2005 QE) than the country's | | | | cost" that is the cost of converting a |
| $1,40,429 million (as on Feb 10 2006) Forex | | | | currency into another currency depending on |
| reserves which could cover all most 13 | | | | the current exchange rate at the material |
| months' imports. The gross NPA in the banking | | | | time. The other important thing would be the |
| system is hinges on 5.2 % where as the CRR is | | | | comparative interest rate in India as well in |
| 5% currently.Whether A Boon or A BaneAt | | | | other deposit exporting countries.Full |
| present, the Indian rupees is fully | | | | capital account convertibility may encourage |
| convertible on the current account for free | | | | arbitrage. The exploitation of prevailed |
| trade in goods and services and transfer of | | | | differential interest or exchange rate, would |
| remittances. Indian companies' borrowing | | | | become quite common. Even the individual |
| abroad, investments in abroad, individuals' | | | | depositors too can make most use of those |
| ability to invest in stocks and property | | | | opportunities, that would place Indian |
| abroad, these are restricted by lack of | | | | currency in high volatile category. In short |
| convertibility. The gross domestic product | | | | we will headed for a scenario where violent |
| GDP has registered a robust 7% to 8% growth | | | | swings in interest and exchange rate are |
| in the last few years, along with inflation | | | | possible. How will Indian banks be prepared |
| moderating to 4%.The economic fundamentals | | | | to deal with this kind of scenario? Rouge |
| are strong , the air of optimisim is thick in | | | | speculators cannot be eliminated from the |
| the air, as the foreign investors investing | | | | system. If that happens, as happened in the |
| their money on the Bombay Stock Exchange, | | | | South-East Asian Countries and Latin America |
| BSE. The BSE sensex has already crossed11000 | | | | some years back, it would wipe out years of |
| points. The Capital convertibility will give | | | | development and could unsettle the overall |
| companies the much needed flexibility and | | | | economy.The Capital account convertibility is |
| negotiating power to raise capital in any | | | | thus like a "double- edged" weapon, so the |
| currencies at finer rates to acquire foreign | | | | government should place enough regulatory |
| assets with foreign capital, full | | | | mechanism and safeguard measures before going |
| convertibility seems the way to go now. The | | | | for full convertibility announcement.M. |
| Removal of these restrictions will help | | | | |