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