Convertibility of Rupee

Arun Mishra
9893686820
arunjimishra@gmail.com
Rupee Convertibility
The term convertibility of a currency means that it
can be freely converted into any other currency.
It helps in the removal of quantitative restrictions
on the trade.
After the announcement of economic liberalisation
in July 1991, Govt. of India announced partial
convertibility of Rupee from March 1, 1992.
Under this partial convertibility 40% of the
current account transactions were convertible in
rupee at officially determined exchange rate &
remaining 60% at market determined exchange
rate.
Unified Exchange Rate
The Govt. of India, in March 1993, introduced a
fully unified market determined exchange
rate system.
The unification of exchange rate and floating
rupee was started in 1993-94.
The final step is the announcement of full
convertibility of the rupee on current
account in August 1994 by accepting the
obligation under article VII of the IMF.
 Currency
Convertibility

Current Capital
Account Account
Convertibility Convertibility
Current Account Convertibility
Convertibility on current account is defined as, the
freedom to buy or sell foreign exchange for
the following international transactions:
All payments due in connection with foreign
trade, other current business including services and
normal short term banking and credit facilities.
Payments due as interest on loan.
Pursuing Higher education abroad.
Tourism.
Moderate remittances for family living
expenses.
Implications of Convertibility
Now the authorised dealers are empowered to
release exchange without prior approval
of Reserve Bank of India.
Exporters find it easy to transact the
business.
Many bureaucratic hurdles are eliminated
in the process of obtaining foreign exchange
for imports.
More than 100 countries in the world
allowed full convertibility of their currencies
on capital account.
Capital Account Convertibility
Capital Account Convertibility (CAC) is
the freedom to convert local financial assets
into foreign financial assets
at market determined exchange rates.
Non-Convertible capital
Cuba(peso) and North Korea(won)
Non participation in FOREX market
Major challenge for domestic currencies there.
Partial Convertible Capital-
Indian Rupee
RBIs restriction on the inflow and outflow of capital
Full Convertible Capital-
US dollars
No restrictions or limitation on the amount to be
traded
Thus, this is one of the major currency traded in
FOREX market
 Upto 1991, there was rigid control on both
Capital and Current account.

Capital account convertibility was introduced in

India in August 1994.

In 1997 the government had set up a committee

(Tarapore committee) to spell out a road map for
the full convertibility of the rupee.
Tarapore Committee
Committee on capital account convertibility, set
up by RBI(Reserve Bank of India) under the
chairmanship of former RBI deputy governor
S.S. Tarapore.
Economists Surjit S Bhalla, M G Bhide, R H
Patil, A V Rajwade and Ajit Ranade were the
members of the Committee.
The report submitted by this Committee in the
year 1997 proposed a three-year time period
(1999-2000) for total conversion of Rupee
 The Second Tarapore Committee on
Capital Account Convertibility
Reserve Bank of India appointed the second
Tarapore committee to set out the framework for
fuller Capital Account Convertibility.
The report of this committee was made public by
RBI on 1st September 2006.
In this report, the committee suggested 3 phases of
adopting the full convertibility of rupee in capital
account.
First Phase in 2006-7
Second phase in 2007-09
Third Phase by 2011.
 The government is adopting a cautious
approach, taking into consideration all
aspects and the risks involved in opening
up the economy by allowing convertibility
of the currency.