Capital Account Convertibility—Myth and Reality

Abstract

The forces of globalization and liberalization cut across borders, reintegrating the world toward a common goal of development. The liberalization reforms which swept across India in 1991 changed the face of its economy. In the current stream of events, where globalization has become the “hot” word, and financial liberalization is synonymous with “developed economies,” the key issue that needs to be considered is whether India is ready to take the plunge towards full capital account convertibility (FCAC). The Government of India has several times made an attempt to go for full convertibility of the Indian rupee, based on the recommendations of several committees, but has changed its mind, taking into consideration global experiences. Now, Indian policymakers are again concerned about the issue within the context of the global economy and flagging economies, and reconsidering whether FCAC is the proper solution. The article discusses the concept of balance of payments, rupee convertibility, capital account convertibility, and the pros and cons of FCAC from the perspective of Indian policymakers.