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PM backs full float of rupee
Prime Minister Manmohan Singh with TCS chief executive S. Ramadorai in New Delhi on Saturday. (PTI)

Mumbai, March 18: Taking a step towards full capital account convertibility, Prime Minister Manmohan Singh today asked the finance ministry and the Reserve Bank of India (RBI) to draw a roadmap in this regard.

“Given the changes that have taken place over the last two decades, there is merit in moving towards fuller capital account convertibility within a transparent network. This issue was first examined by the Tarapore Committee. Much water has flown down the Ganga since then. Our own position, internally and externally, has become far more comfortable,’’ he said while justifying the need to look at the issue again.

Singh made this observation while releasing the third volume of the history of the RBI here today. He requested finance minister P. Chidambaram and the central bank to “revisit the subject and come out with a roadmap based on current realities.’’

Currency convertibility is defined as the freedom to convert one currency into other internationally accepted currencies. There are two kinds of convertibility ' current account convertibility and capital account convertibility.

Under current account convertibility, an individual has the freedom to buy and sell foreign exchange for international transactions that covers business travel, study and tours abroad and payments in connection with foreign trades.

Capital account convertibility is the process where local financial assets can be converted into other currency-denominated assets and vice-versa at market determined rates of exchange, implying complete mobility of capital across countries.

Over the last couple of years, the RBI has relaxed regulations pertaining to overseas investment by domestic companies under the automatic route. However, the central bank continues to bar domestic citizens to draw foreign exchange for many purposes, including the purchase of items like lottery tickets and participation in sweepstakes. Individuals are also prohibited from directly investing in shares listed on overseas bourses.

The issue of capital account convertibility was first considered by the Tarapore Committee in 1997. The panel had suggested that certain pre-conditions should be met to bring about capital account convertibility. These included reduction in gross fiscal deficit, mandated rate of inflation, deregulated interest rate regime and a reduction in non performing assets of banks.

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