Convertibility of Rupee; Current account Convertibility, Capital account Convertibility

Convertibility of a currency refers to the ease with which it can be converted into other currencies or assets. In the case of the Indian rupee, convertibility has been a gradual process, with the country adopting a phased approach towards greater convertibility over time.

Currently, the Indian rupee is partially convertible, with different degrees of convertibility for the current account and the capital account.

Current Account Convertibility: Current account convertibility refers to the freedom to convert rupees into foreign currency and vice versa for current account transactions. Current account transactions include payments for imports and exports of goods and services, travel expenses, and remittances. India adopted current account convertibility in 1994 as part of its economic liberalization policies. Since then, the rupee has been fully convertible for current account transactions, with no restrictions on the amount that can be converted.

Capital Account Convertibility: Capital account convertibility refers to the freedom to convert rupees into foreign currency and vice versa for capital account transactions, such as foreign investments and borrowing. India has adopted a more cautious approach towards capital account convertibility, given the potential risks associated with sudden capital outflows. The country has gradually relaxed restrictions on capital account transactions over time, with the current policy allowing for some degree of capital account convertibility for certain types of transactions. However, there are still restrictions on the amount and purpose of foreign investments and borrowing that can be made by residents and non-residents.

In summary, the Indian rupee is currently partially convertible, with full convertibility for current account transactions and limited convertibility for capital account transactions. The government continues to review and adjust its policies towards greater convertibility over time, with a focus on maintaining stability in the domestic and international financial system.