Convertibility Of Rupee – Indian Economy

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CONVERTIBILITY OF CURRENCY

Prior to the First World War the whole world was having gold standard under which the currency in circulation was allowed to get converted either in gold or other currencies based on the gold standard.
But after the failure of Bretton woods system in 1971 this system changed.
Presently convertibility of money implies a system where a country’s currency becomes convertible in foreign exchange and vice versa.
Since 1994, Indian rupee has been made fully convertible in current account transactions.

Convertibility of Rupee:

TheUnion Budget for 1992-93 has made the Indian rupee partially convertible.
This was an inevitable move for the expeditious integration of Indian economy with that of the world In order to face the serious current account deficit in the balance of payments, the Government of India introduced the partial convertibility of rupee from March 1. 1992.
Under this system, which remained in operation for a period of one year, 60 per cent of the exchange earnings were convertible in rupees at market determined exchange rate and the remaining 40 per cent earnings were convertible in rupees at the officially determined exchange rate.
The term convertibility of a currency indicates that it can be freely converted into any other currency. The removal of quantitative restrictions on trade and payments on current account. Convertibility establishes a system where the market place determines the rate of exchange through the free interplay of demand and supply forces.

Current Account Convertibility

This is the next phase for attaining full convertibility of rupee.
The removal of restrictions on payments relating to the international exchange of goals, services and factor incomes, while capital account convertibility refers to a similar liberalization of a country’s capital transactions such as loans and investment, both short term and long term.
Current account convertibility has been defined as the freedom to buy or sell foreign exchange for the following international transactions:

(a) All payments due in connection with foreign trade, other current business, including services and normal short term banking and credit facilities;
(b) Payments due as interest on loans and as net income from other investments;
(c) Payments of moderate amount of amortization of loans or for depreciation of direct investment; and
(d) Moderate remittances for family living expenses.

Capital Account Convertibility:

This refers to a liberalization of a country’s capital transactions such as loans and investment, both short term and long term as well as speculative capital flows.
In a way, capital account convertibility removes all the restrains on international flows on India’s capital account.
There is a basic difference between current account convertibility and capital account convertibility.
In the case of current account convertibility, it is important to have a transaction – importing and exporting of goods, buying and selling of services, inward or outward remittances, etc. involving payment or receipt of one currency against another currency. In the case of capital account convertibility, a currency can be converted into any other currency without any transaction.

Advantages of Currency Convertibility