India is not yet ready for full capital account convertibility. Discuss the reasons and the recent trends in this regard.

The term Capital Account Convertibility was coined by RBI and this term is almost synonymous with the RBI committee headed by SS Tarapore.
Capital account convertibility (CAC) means the freedom to convert local financial assets into foreign financial assets and vice versa at market determined rates of exchange. This implies that Capital Account Convertibility allows anyone to freely move from local currency into foreign currency and back.
Capital controls are used by the state to protect the economy from potential shocks caused by unpredictable capital flows. Capital account convertibility means the freedom to convert a currency for capital transactions and the rupee is not fully convertible on that front yet, though capital flows have been liberalised in recent years.

G Padmanabhan, Executive Director of the Reserve Bank of India (RBI), has suggested that India should move towards making the rupee more convertible for capital transactions by foreign investors.

Mr. Padmanabhan said. "Increasing openness to international trade may create opportunities for circumvention of capital account restrictions through under- and over-invoicing of trade transactions, and the increasing sophistication of investors and global financial markets makes it much easier to do so,’’ he conceded. Corporates could use transfer pricing to get around capital account restrictions, he said. However, keeping any restriction for too long could prove self-defeating as people ended up finding new methods of bypassing that restriction, he added. Ipso facto, he felt, India should move towards full capital account convertibility. "There is simply no escape from it,’’ Mr. Padmanabhan asserted.
How fast that movement should be would, however, depend on how fast the country could meet the pre-conditions such as

•  fiscal consolidation,
•  inflation control,
• low level of NPAs (non-performing assets),
• low and sustainable current account deficit,
• strengthening of financial markets,
• prudential supervision of financial institutions etc.

`India has already made visible progress on these fronts. There are, of course, risks, but we need to accept these risks and move forward boldly while controlling the risks as far as practicable.
Sound policies, robust regulatory framework promoting a strong and efficient financial sector, and effective systems and procedures for controlling capital flows greatly enhanced the chances of ensuring that such flows fostered sustainable growth and did not lead to disruption and crisis.India has all these in place, and we need to keep on strengthening them.
What can it do?
It can lead to free exchange of currency at lower rates. Also, it can result in unrestricted mobility of capital.
How does it benefit a nation?
It can trigger stepped up inflow of foreign investment. Transactions also can become much easier, and occur at a faster pace.
What are the negatives?
It could destabilise an economy especially if there is massive capital flows in and out of the country. Currency appreciation/depreciation could affect the balance of trade.
Where does India stand now?
India currently has full convertibility of the rupee in current accounts such as for exports and imports. However, India’s capital account convertibility is not full. There are ceilings on government and corporate debt, external commercial borrowings and equity.

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