Capital-Account Convertibility

Capital-account convertibility means the freedom to convert domestic financial assets into foreign financial assets, and vice versa, at market-determined exchange rates. It concerns cross-border investment, lending, borrowing and asset acquisition, unlike current-account convertibility, which concerns payments for goods, services, income and transfers.

Exchange-control framework under FEMA

The Foreign Exchange Management Act, 1999 provides the legal framework for foreign-exchange transactions in India.

• Under Section 2(e), a capital-account transaction alters the foreign assets or liabilities of an Indian resident, or the Indian assets or liabilities of a non-resident, including contingent liabilities.
• Under Section 5, current-account transactions are generally permitted, subject to restrictions imposed under the Act.
• Under Section 6, capital-account transactions may be permitted, prohibited or regulated through prescribed rules and regulations.

India's position

India follows partial capital-account convertibility, not unrestricted convertibility. Capital can move across borders only through permitted categories and subject to applicable limits, routes and conditions.

• Regulated transactions include foreign direct investment, portfolio investment, external borrowing, overseas investment and acquisition of immovable property.
• Convertibility is distinct from the exchange-rate regime: a market-determined exchange rate does not by itself imply free capital movement.
• Even fuller convertibility can coexist with prudential, taxation, reporting and anti-money-laundering requirements.

Rationale for a calibrated approach

Capital-account liberalisation can improve access to global savings and permit portfolio diversification, but volatile flows can also amplify exchange-rate, banking and external-sector risks.

• The RBI's Tarapore Committee, 1997 proposed a phased path linked to fiscal consolidation, low inflation and financial-sector strength.
• The Committee on Fuller Capital Account Convertibility, 2006 again emphasised sequencing and macroeconomic and financial stability rather than immediate unrestricted convertibility.

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