Making the Elephant Dance Through Capital Account Convertibility

Essay by vyasdhavalUniversity, Master's August 2005

download word file, 8 pages 4.0

Capital Account Convertibility is one of the ways to integrate a nation's economy with the global economy, to deepen and integrate financial markets, to increase access to global savings, to discipline domestic policy makers and to allow greater freedom to individual decision-making and proliferation of Information Technology. India must meet these pre-conditions before implementing full convertibility of rupee on Capital Account.

The inevitable globalization process has set in motion a mega change, which has motivated a big elephant, Indian Economy, to move with the changing world, by initiating the economic reforms way back in 1991. Later, the same force has started insisting on the elephant to dance. But, can an elephant dance? Yes it can dance, if it is provided with sufficient food (further reforms) along with melodious music (proper regulation). In fact, there are many ways to make the elephant dance; the first and foremost of them is Capital Account Convertibility (CAC).

CAC implies freedom to convert rupees into foreign currency for transactions on capital account. CAC refers to the freedom to convert local financial assets into foreign financial assets and vice versa at market-determined exchange rates. It is associated with changes of ownership in foreign/domestic financial assets and liabilities and embodies the creation and liquidation of claims on, or by, the rest of the world. CAC is introduced only after experimenting with the current account convertibility for a reasonable time, stabilization programs have been successfully carried out and favorable conditions have been ensured.

The introduction of CAC helps a country in attracting certain types of capital flows from abroad. It also enables residents to hold internationally diversified investment portfolios, thereby, having more risk bearing capacity. On the other hand CAC is one of the essential parameters for any country to integrate their economy with global economy. It helps...