You can buy most things foreign with rupees when they are imported. You can travel abroad and buy whatever dollars you need - well almost - over the counter.
MUMBAI: So what’s the big deal about India’s move towards fuller capital account convertibility (CAC)?
You’re right. For most practical things in life, you don’t need CAC.
You can buy most things foreign with rupees when they are imported. You can travel abroad and buy whatever dollars you need - well almost - over the counter.
You can also incur expenses abroad on your credit card and pay for the dollars (or pounds, or euros) expended in rupees.
You can invest in specified foreign shares and mutual funds up to $25,000 every year — that’s more than Rs11 lakh, enough for anybody but the super-rich.
So why would the Reserve Bank of India bring former deputy governor SS Tarapore out of retirement to work out yet another roadmap for capital account convertibility? Why won’t the old one, which Tarapore submitted in the late nineties, do?
Well, much has changed since then. The most important thing that has changed is that India is awash with foreign currency reserves today ($137 billion, excluding gold, at last count).
Equally, India Inc is getting impatient with all the permissions it requires to buy companies and assets abroad. Fuller CAC will help them do that in a jiffy.
An economy is said to have CAC when there is complete freedom to convert local currency into foreign currency and vice versa - without the permission of the RBI, and without limits.
As of now, India has current account convertibility. This allows residents to receive and make payments in foreign currency for all purposes other than investments and loans.
It also allows trade-related payments and receipts by importers and exporters — in dollars and any other foreign currency.
A capital account transaction, on the other hand, consists of foreign direct investment (both by foreigners in India and by Indians abroad), investment in financial securities (both ways), giving and receiving of foreign loans and short-term investments by foreigners in India and vice-versa.
So what does this mean for India and the Indians? As of now there are limits to the amount of foreign exchange one can take abroad depending on the purpose at hand. Individuals can freely remit up to $25,000 per calendar year for any permissible current or capital account transaction or a combination of both. But with
Let’s say, an individual wants to invest in stock markets abroad. He can do that up to $25,000 annually. With CAC coming in, there will be no limit on this.
Similarly for a person wanting to go abroad for a holiday, the current limits are $10,000 per calendar year; with CAC coming in, there will be no upper limit.
The current limit for business travel, which stands at $25,000, will also go. Under full CAC, there are just no limits on the money you can take abroad.
There will also be greater freedom for money to come in. NRIs and persons of Indian origin can, as of now, repatriate up to $10 million a year from their non-resident rupee accounts. Once full CAC comes in, there will be no upper limit on this as well.
The same rules apply to foreign firms also, which can invest at their own discretion — without RBI permission. Indian companies also benefit in that they can access more money faster.
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