WHAT IS CAPITAL ACCOUNT CONVERTIBILITY

Capital Account Convertibility means free inflow and outflow of capital across nations.It refers to the freedom to convert local financial assets into foreign financial assets and vice versa. In other words, free conduction of transactions of local financial assets  into foreign financial assets at country determined exchange rates is called capital account convertibility.

Basically, it was an effort by Reserve Bank of India to find fiscal and economic policies that would facilitate the transition of third world countries into globalized market economies. CAC already existed for non-residents and foreign investors in India.According to the Tarapore committee, Capital Account convertibility has a different meaning for different entities.They are:

FOR INDIVIDUALS:

*Anyone can borrow from NRIs and open accounts abroad.

*Any individual investor can subscribe to foreign currency deposits.

*NRIs can repatriate their non-repatriable assets.

FOR CORPORATES:

*Companies can issue additional equity overseas without seeking prior permission from the RBI.

*They can also issue dollar bonds or deposits.

*They can invest in bonds of any currency.

FOR BANKS:

*Access to foreign currency loans up to one-year maturity is made easier.

*Banks can fund business overseas at their discretion.

*They can accept deposits in foreign currency.

FOR INVESTORS:

*Investment institutions can expand their horizon to even the New York stock exchange with overall ceiling going up to $2 billion.

*FIIs now need not seek FERA approval from the RBI every 5 years.

FOR FINANCIAL MARKETS:

*Forex markets get a major boost with an expanded business.

*Dealing no longer exclusive preserve of banks.

*Derivatives allowed

*Government securities market becomes liberalized.

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