Currency Convertibility

Currency convertibility implies the ease with which a country’s currency can be converted into gold or another currency. Convertibility is very significant for international trade and commerce. When a currency is inconvertible, it becomes a risk and barrier to trade with foreign countries that have no need for the domestic currency. Currency convertibility is the ease with which a country’s currency can be converted into gold or another currency. Currency convertibility is important for international commerce as globally sourced goods must be paid for in an agreed-upon currency that may not be the buyer’s domestic currency.

In India, there is convertibility for current international transactions but restrictions exist for international capital movements. The Indian rupee has a market-determined exchange rate but the RBI trades actively in the USD/INR currency market to impact the effective exchange rates. Other rates the EUR/INR and INR/JPY have the volatility characteristic of floating exchange rates. Through RBI, the central bank has not followed a strategy of pegging the INR to a specific foreign currency at a particular exchange rate. RBI intervention is only done to ensure low volatility in exchange rates. RBI does not intervene to influence the rate of the Indian rupee in relation to other currencies.

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