CAPITAL ACCOUNT CONVERTIBILITY (CAC)

It means freedom to convert currency, both in terms of outflows and inflows, for capital transactions

International movement of capital is not always free. Controls are used by the state to insulate the economy from erratic flow of capital, which can lead to financial instability.

In India, for example, there are restrictions on movement of foreign capital and the rupee is not fully convertible on capital account. Capital account convertibility (CAC) means freedom to convert currency, both in terms of outflows and inflows, for capital transactions. 

Benefits of Capital Account Convertibility

The Tarapore Committee defined CAC as the freedom to convert local financial assets with foreign financial assets and vice-versa at market determined rates of exchange and mentioned the following as its benefits.

• Availability of large funds to supplement domestic resources and thereby promote economic growth

• Improved access to international financial markets and reduction in cost of capital

• Incentive for Indians to acquire and hold international securities and assets

• Improvement of the financial system in the context of global competition

Why capital account convertibility?

Countries prefer capital account convertibility to promote the inflow of foreign capital. Despite the various risk associated with capital flows like fluctuations in various segments of the financial market, countries like India goes for it to get the advantage of having additional foreign capital.

Status of capital account convertibility in India

There is partial capital account convertibility in India. Though tremendous capital account liberalisation measures were taken place since the launch of economic reforms, introduction of full capital account convertibility is yet to be implemented. In the case of current account there is full convertibility. Altogether, there is the rupee is partially convertible.