Meaning of a Convertible Currency: A currency that can be freely exchanged into another currency for any purpose, without regulatory restrictions. Convertible currencies are generally associated with open and stable economies, and their prices are typically determined through supply and demand forces in the foreign exchange market.
India has made great strides in economic growth, reporting a 7. We look at the current state of Indian markets within the existing partial rupee convertibility scenario, what a change could mean for India and the world, and the pros and cons of rupee convertibility.
It indicates the extent to which the regulations allow inflow and outflow of capital to and from the country. Until the early s pre-reform periodanyone willing to transact in a foreign currency would need permission from the Reserve Bank of India RBIregardless of the purpose.
After liberal economic reforms were introduced inmany significant developments occurred that impacted the way forex transactions and businesses were conducted.
However, Indians still require regulatory approvals if they want to invest an amount above a pre-determined threshold level for the purpose of investments or purchasing assets overseas. As of today, the Indian rupee is partly convertible, which means that although there is a lot of freedom to exchange local and foreign currency at market rates, a few important restrictions remain for higher amounts and these still need approvals.
Current account convertibility implies that the Indian rupee can be converted to any foreign currency at existing market rates for trade purposes for any amount.
It allows easy financial transactions for the export and import of goods and services. In essence, current account convertibility remains within the institutional trading realms. In the beginning of reforms, the rupee was made partially convertible for goods, services and merchandise only.
During mids, the rupee was made fully convertible for current account for all trading activities, remittances and indivisibles. As of today, one can still bring in foreign capital or take out local money for these purposes, but there are ceilings imposed by the government that need approvals.
Advantages Sign of stable and mature markets: Regulators like to keep control on their territories. Free and open entry to an enormous number of global market participants would increase the risk of losing regulatory control due to large market size and huge flow of capital.
Opening up to fully convertible currency is a solid sign that a country and its markets are stable and mature enough to handle free and unrestricted movement of the capital, which attracts investments making the economy better.
Increased liquidity in financial markets: Improved employment and business opportunities: It also helps in creating new employment opportunities across various industry sectors, as well as nurturing entrepreneurship for new businesses.
Onshore rupee market development: Trading of the INR is still far lower than other currencies such as the euro. Making the rupee fully convertible would enable greater trades and global flow of Indian currency, helping national markets with improved liquidity, better regulatory purview and reduced dependence and risks from offshore market participants.
Easy access to foreign capital: Better access to a variety of goods and services: Amid current restrictions, one does not see much variety in India for foreign goods and services.Foreign Currency Exchangeable Bonds (FCEBs).
Meaning of FCCBs: A FCCB is issued as a bond by an Indian company is expressed in foreign currency and the principal and interest too are payable in foreign currency. A fully convertible currency can be traded without any government restriction for another currency. The trade can be either to sell the domestic currency (to take funds out of the country for example) or to buy the domestic currency (foreign investors for instance).
1 A "foreign bond" issue is a) one denominated in a particular currency but sold to investors in national capital markets other than the country that issued the denominating currency.
b) one offered by a foreign borrower to investors in a national market and denominated in that nation's currency.
Presumably, transfer of offshore rupee denominated bonds between two non-residents would be outside the ambit of tax in India. However, investors will be more reassured if a provision similar to that on the transfer of foreign currency convertible bonds and global depository receipts (GDRs), as contained in 47(viia) of the Income-tax Act, is.
A currency is said to be fully convertible, if it can be converted into some other currency at the market price of that currency. At present, Indian rupee is partly convertible on current Account. That is convertibility in the case of transactions relating to exchange of goods and services, money transfer.
To conclude, the foreign debt problem of Indian corporate consequent to the currency risk is apart from the domestic debt they have. In fact, the concentration of debt due to the small base of large enterprises does pose its challenges and is a worrying phenomenon.