Prime Minister Dr Singh is right in advocating a phased movement to fall convertibility starting with Special Economic Zones (SEZs), we need to move along the convertibility highway, even if slowly. Our Economy is in take off-stage and needs timely infusions of fixed and working capital. Since India is now an enterprise-driven economy like most others, the Rupee needs to become more convertible to reduce transaction costs. Fears of a Recurrence of the 1991 crisis, when our reserves were insufficient to finance 3 weeks of imports are perhaps exaggerated. The currency has been ruling at below 47 to a dollar for the last 6 months. Investors and rating agencies are convinced that India’s growth story is here to stay. Their views determine the flows of FDI & FPI in a big way. Current Account transactions no longer influence a country’s BoP profile to the extent they did a couple of decades ago. Despite a ballooning trade deficit, our reserves have steadily increased over the years to 144 billion dollars.

Learning Objectives

1) Current Account Transactions no longer influence a country’s B.O.P. Discuss.

2) What is Capital Account Convertibility?

3) What are the risks in Capital Account Convertibility in the Indian context?

4) What is the present status of Capital Account Convertibility in India?