According to media reports Reserve Bank of India governor Raghuram Rajan has put capital account convertibility, an idea he broached last month, rely on the central bank’s front burner. B. Sundaresan explains the concept and how it can affect India’s economy:
What is capital account convertibility (CAC)?
According to the Tarapore Committee on CAC constituted by the RBI in 1997, CAC is the freedom to convert local financial assets and vice-versa at market determined rates of exchange. For someone in India it would mean that he will be allowed to trade without excessive restriction in international financial assets, something which is not possible right now.
How is different from converting rupees to dollars?
At present, India’s rupee convertibility is on the current account and not capital. This means that you can convert your rupees freely to dollars if you are importing something (as far it does not concern capital assets) or the…
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