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Full convertibility on capital account unlikely for few years (Relevant for GS Prelims and Mains Paper III)

India is not looking at full capital account convertibility for the next few years, a senior finance ministry official said.

View of ex-RBI Governor
Raghuram Rajan, the previous Reserve Bank of India governor, had said that the central bank was looking at bringing in capital account convertibility in a few years.
Even the International Monetary Fund (IMF), that has advocated such convertibility for decades, has become more cautious about its benefits for developing economies in the recent past.

Alternative steps taken by the recent govt. to ease the foreign capital
1. Enumerating the steps taken by the government in the past two years to ease access to foreign capital, be it portfolio flows or foreign direct investment, new instruments have also been made available for foreign investors such as rupee-denominated offshore bonds (also known as masala bonds) and alternate investment funds.

2. The external commercial borrowings framework was liberalised significantly in December 2015 with the caps (on such borrowings) enhanced. 

3. Despite the currency risk, the Indian market offers attractive returns to foreign investors. The return on government securities is 7 per cent to 8 per cent, so the returns one would expect on equity would be higher. 

What is Capital account convertibility?
Capital Account Convertibility means that rupee can be freely convertible into any foreign currencies for the acquisition of assets like shares, properties and assets abroad. Further, the banks can accept deposits in any currency.

Currency convertibility means “the freedom to convert one currency into other internationally accepted currencies, wherein the exporters and importers were allowed a free conversion of a rupee.

Capital controls are used by the state to protect the economy from potential shocks caused by unpredictable capital flows. In India, Current account is largely convertible but there are severe restrictions on capital account.



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