Capital Account Convertibility by Kannammai Palaniappan

Capital account and current account are two major components contributing to balance of payments. Current account represents regular trade transactions whereas capital account represents ownership of assets. Surplus in capital account represent inflow of money for domestic assets whereas deficit represent more of foreign asset ownership by domestic players.

Current account includes imports and exports. Government of India has not implemented any cap for current account transactions. Current account transactions can happen smoothly without any Foreign exchange permission. Capital account transaction has been capped to a limit of $125000 and is under discussion to make modifications.

Capital account convertibility is free conversion of local currency to foreign currency to acquire foreign assets at market price. This also applies to conversion of foreign currency to local currency.  Capital account convertibility increases flexibility in international ownership.  As per present India’s juncture, Modi attracts investments and is in a state of nature to pull India along with other global nations in terms of standards, ranking, economy, growth and still more. To push India along with other global concerns full capital account convertibility has to be implemented. But full capital account convertibility also brings in too many risks and challenges to be faced which is proved to be difficult with current Indian economy’s stability.

So, RBI has planned to increase capital account convertibility to a cap of $250000 which is a step towards full capital account convertibility.  This would liberalize foreign investors to certain extent, which will be favorable for attracting investments towards India. This also further helps in globalization by Indian companies and individuals as well. Capital account convertibility extension would open door for better opportunities.     RBI has planned to stabilize inflation, exchange rates in order to implement full capital account convertibility. This shows very clearly that GOI and RBI are moving forward with a positive synchronization. Hope their bonds bring in escalation.