1. CAPITAL ACCOUNT CONVERTIBILITY

2. MEANING  Capital Account Convertibility means the exchange of currencies on account of capital transactions without any restrictions from the government or the central bank of the country.  Capital transactions means inflow or outflow of money for the purpose of investment.  Thus FCAC means that a Indian resident can invest in any asset or property out of India without any restrictions. Same applies to a foreign resident in India.  As per the convertibility rule, the rupee can be converted on current account as implemented since 1994. So, it can be changed freely into foreign currency for purposes like trade-related expenditures. However, it cannot be converted freely for activities such as acquiring overseas assets

3.  Article VIII of the International Monetary Fund (IMF) puts an obligation on a member to avoid imposing restrictions on the making of payments and transfers for current international transactions. Members may cooperate for the purpose of making the exchange control regulations of members more effective. Article VI (3), however, allows members to exercise such controls as are necessary to regulate international capital movements  India had committed to CAC more than a decade ago. But certain parameters are to be fulfilled like fiscal gap shall have to be 3.5% or below, debt servicing ratio to be 20% or below.

4. TARAPORE COMMITTEE  A committee on capital account convertibility was setup by the Reserve Bank of India (RBI) under the chairmanship of former RBI deputy governor S.S. Tarapore to "lay the road map" to capital account convertibility. In 1997, the Tarapore Committee had indicated the preconditions for Capital AccountConvertibility. The three crucial preconditions were fiscal consolidation a mandated inflation target and strengthening of the financial system. The five-member committee has recommended a three-year time frame for complete convertibility by 1999-2000.

5.  The highlights of the report including the preconditions to be achieved for the full float of money are as follows:- Gross fiscal deficit to GDP ratio has to come down from a budgeted 4.5 per cent in 1997-98 to 3.5% in 1999-2000. A consolidated sinking fund has to be set up to meet government's debt repayment needs; to be financed by increased in RBI's profit transfer to the govt. and disinvestment proceeds. Inflation rate should remain between an average 3-5 per cent for the 3- year period 1997-2000 Gross NPAs of the public sector banking system needs to be brought down from the present 13.7% to 5% by 2000. At the same time, average effective CRR needs to be brought down from the current 9.3% to 3% External sector policies should be designed to increase current receipts to GDP ratio and bring down the debt servicing ratio from 25% to 20%

6. Why FCAC  Given the huge investment needs of the country and that domestic savings alone will not be adequate to meet this aim, inflows of foreign capital become imperative.  The logic for the introduction of complete capital account convertibility in India, according to the recommendations of the Tarapore Committee, is to ensure total financial mobility in the country. It also helps in the efficient appropriation or distribution of international capital in India.  The objectives of FCAC are:  (i) to facilitate economic growth through higher investment by minimising the cost of both equity and debt capital;  (ii) to improve the efficiency of the financial sector through greater competition, thereby minimising intermediation costs and  (iii) to provide opportunities for diversification of investments by residents.

7.  As per the reports, India has drafted a plan on fuller capital account convertibility. And accordingly, a three-phase plan has been chalked out till 2010-11 which would allow greater movement of capital in and out of the local currency. RBI Governer has reassured that India is preparing for full convertability.  However, at the present moment, the problem India faces is one of excessive inflows of foreign capital, which is resulting in an appreciation of the rupee. Such appreciation adversely affects the competitiveness of Indian exports. Hence, there is a strong lobby that not only wants the central bank to intervene and stall rupee appreciation, but also to adopt policies that can moderate the surge in capital inflows. This is holding back the transition to full capital account convertibility for the time being.

8. CRITICISM  Some critics argue that RBI ’ s endeavor for FCAC is the result of pressure from wealth holders within the country who want the option of transferring wealth abroad both to earn returns and hedge against any possible weakening of the rupee. That this could be at the expense of instability that undermines the living standards of the less well-to-do obviously does not bother them.  Secondly, the current levels of forex reserves will not be able to cope with the rising demand of forex.  India has experienced both ‘ floods ’ and ‘ sudden stops ’ of capital flows. Net capital flows to India increased from as low as US$ 7 billion in 1990-91 to US$ 45 billion in 2006-07, and further to US$ 107 billion during 2007-08, the year just before the crisis. They dropped to as low as US$ 7 billion in 2008-09 at the height of the crisis. Capital flows are estimated to have recovered to around US$ 50 billion in 2009-10.  Hence controls are desirable to that extent.