Should India Opt for Full Capital Account Convertibility?

Abstract

The usefulness of easing controls on capital flows in a country is a long-debated question. It is argued that the liberal capital control regime boosts the confidence of the international community on the domestic economy and becomes instrumental fo r ensuring higher capital inflows. On the contrary, it is widely held that controls on capital flow s ensure a developing country against experiencing a sudden potential currency crisis. In the light of the current debate in India on the appropriateness of adoption of Capital Account Convertibility (CAC), the current paper looks into the interrelation between current and capital account balance in the country first, and the macroeconomic scenario next, in order to explore whether the country has reached a stage to opt for fullfledged CAC. The empirical findings suggest that India should move cautiously in this regard.