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Capital account convertibility: What would it mean for you?

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Our Bureau

Chennai, March 21

The Prime Minister's recent call to usher in full convertibility of the rupee, and the appointment of the second Tarapore Committee to prepare the roadmap for it throws the spotlight on the issue of full capital account convertibility once more.

The country already has current account convertibility - meaning resident Indians and companies can make and receive payments for import/export of goods and services and be able to access foreign currency for travel, education, medical or other designated purposes.

So what is full capital account convertibility? Check out what the first Tarapore Committee on Capital Account Convertibility appointed in February 1997 had to say on this: "Capital account convertibility (CAC) refers to the freedom to convert local financial assets into foreign financial assets and vice versa at market determined rates of exchange. It is associated with changes of ownership in foreign/domestic financial assets and liabilities and embodies the creation and liquidation of claims on, or by, the rest of the world."

So if full capital account convertibility is allowed, what can you or I do that was not possible earlier?

We asked Mr J. Moses Harding, Executive Vice-President and Head of Wholesale Banking Group, IndusInd Bank.

He said, "There exists a restricted capital account convertibility now - by which any Indian entity (individual, company or otherwise) can invest or acquire assets outside India or a foreign entity remit funds for investment or acquisition of assets with specified `cap' on such investments and for specific purpose.

A full convertibility means movement of funds in and out of India without any restrictions and `no questions asked' basis.

This would mean that anybody could walk into a bank and instruct to transfer money anywhere (exception will be restricted countries and/or region specified from time to time) and allow banks to receive funds from any entity from abroad for credit as per instructions of the remitter.

Going forward, it would also mean that a domestic individual can pay in foreign currency for purchases in India - rupee or US dollar or euro or yen will mean the same (hence, the ability to hold your cash in a currency which is strong)."

Would freedom means no restrictions at all on external payments? Would it then be possible to launder money easily?

Mr Moses pointed out that full capital account convertibility would not in any way impede imposition of prudential norms.

He said, "All inflows or outflows of money are subject to know your customer (KYC) and anti-money laundering (AML) guidelines.

The freedom of movement of money is restricted to the sector and quantum. For example, the FII investment in GOI bonds is capped at $2 billion; foreign holding in any domestic entity is restricted to 74 per cent, no FDI into retail space etc...

Making the currency fully convertible does not mean encouraging movement of money obtained from dubious means.

The remitting Bank should ensure that the remitter is KYC-ompliant and the funds comply with AML guidelines.

Similarly the beneficiary Bank should ensure compliance to KYC of the recipient of the remittance.

The freedom will mean that you use legitimate rupee resources for investment in foreign country and a legitimate foreign company can acquire business in India without any restrictions on specific sector or quantum of investment."

How many countries have full convertibility? In those countries, would it be possible for the rupee to be freely exchanged for other currencies or goods purchased through rupees?

Mr.Moses said, "All developed economies have full convertibility, including many South East Asian countries.

Since rupee is not fully convertible, it is of no value - whereas US dollar, pound sterling, euro, Singapore dollar, Malaysian ringitt, Yen etc are accepted.

A convertible currency is accepted in a non-convertible country (eg. US dollar, pound sterling etc are convertible in India) while non-convertible currency is not accepted in convertible country (eg rupee is of no value in US, Europe, Japan etc)."

Related Stories:
`Full float must be done in phases'
Capital account convertibility - Carefully-calibrated approach needed
Capital account convertibility - Challenging the underlying philosophy
Capital account convertibility - Why it's better for India to go slow

(This article was published in the Business Line print edition dated March 22, 2006)
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