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