To understand Capital Account Convertibility, we first need to understand Balance of Payments (BoP).
About BoP
- The balance of payments is a statement of all transactions made between a country and the outside world.
- It consists of two accounts — current and capital account.
- Current account deals mainly with import and export of goods and services
- Capital account deals with cross-border movement of capital by way of investments and loans.
What is Current Account Convertibility?
Current account convertibility refers to the freedom to convert your rupees into other internationally accepted currencies and vice versa without any restrictions whenever you make payments.
What is Capital Account Convertibility?
Similarly, capital account convertibility means the freedom to conduct investment transactions without any constraints.
- Typically, it means no restrictions on the amount of rupees you can convert into foreign currency to enable you, an Indian resident, to acquire any foreign asset.
- Similarly, there should be no restraints on any NRIs bringing in any amount of dollars or dirhams to acquire an asset in India.
- Currently India has partial capital account convertibility.
- Developing countries are usually cautious in opening up their capital account because inflows and outflows of the foreign and domestic capital are prone to volatility. This can lead to excessive appreciation/depreciation of their currency and impact the monetary and financial stability.
