CURRENCY CONVERTIBILITY

Convertible currencies are defined as currencies that are readily bought, sold, and converted without the need for permission from a central bank or government entity. Most major currencies are fully convertible; that is, they can be traded freely without restriction and with no permission required.

Prerequisites The ER must be realistic The country should enjoy low inflation rate and internal financial stability FER should be large in practice The trading partners should open up their trade and payments systems.

Debts levels should be low Fiscal and monetary consolidation should be achieved Labour market reforms including unemployment insurance, job retaining and wage discipline should be achieved.

Fully Convertible Currency The U.S. dollar is an example of a fully convertible currency. There are no restrictions or limitations on the amount of dollars that can be traded on the international market, and the U.S. Government does not artificially impose a fixed value or minimum value on the dollar in international trade. For this reason, dollars are one of the major currencies traded in the FOREX market.

Partially Convertible Currency The Indian rupee is only partially convertible due to the Indian Central Bank’s control over international investments flowing in and out of the country. While most domestic trade transactions are handled without any special requirements, there are still significant restrictions on international investing and special approval is often required in order to convert rupees into other currencies.

Due to India’s strong financial position in the international community, there is discussion of allowing the Indian rupee to float freely on the market, altering it from a partially convertible currency to a fully convertible one.

Nonconvertible Currency Almost all nations allow for some method of currency conversion; Cuba and North Korea are the exceptions. They neither participate in the international FOREX market nor allow conversion of their currencies by individuals or companies.

the North Korean ‘won’ and the Cuban national ‘peso’ cannot be accurately valued against other currencies and are only used for domestic purposes and debts. Such nonconvertible currencies present a major obstruction to international trade for companies who reside in these countries.

Current Account Transactions A Current Account Transaction is a transaction and without prejudice to the generality of the foregoing such transaction includes-  Payments due in connection with foreign trade, other current business, services and short term banking and credit facilities in the ordinary course of business,  Payments due as interest on loans and as net income from investments

 Remittances for living expenses of parents, spouse and children residing abroad, and  Expenses in connection with foreign travel, education and medical care of parents, spouse and children.

Capital Account Transactions Section 2(e) of the Foreign Exchange Management Act, 1999 defines a Capital Account Transaction as a transaction which alters the assets or liabilities, including contingent liabilities, outside India of persons resident in India or assets or liabilities in India. All capital account transactions are prohibited, unless specifically permitted.

Foreign investment in India in any company, firm or proprietary concern engaged or proposing to engage in the following business is completely prohibited:  Chit Fund  Nidhi Company  Agricultural or plantation activities  Real Estate business or construction of farmhouses