In April 2015, India’s central bank governor said something that made headlines. He hoped the rupee would become fully convertible “in a short number of years.” A decade later, that still has not happened. India lets you convert rupees freely for trade and travel. It still tightly controls how freely you can convert rupees for investment.
MCQ QuestionsMust Know.
What Convertibility Means.
Two Kinds of Convertibility.
- Convertibility. This is the freedom to exchange a domestic currency for a foreign currency, or back again, without government restriction.
- Current Account Convertibility. This covers trade in goods and services, travel, and remittances. Rupees can be freely converted for these purposes.
- Capital Account Convertibility. This covers capital transactions — buying foreign assets, raising foreign loans, and similar flows. India still restricts this.
- Not Fixed Rates. Convertibility is not about who sets the exchange rate. It is about whether conversion itself is freely allowed.
India Went Convertible on the Current Account in 1994.
- March 1993. India unified its exchange rate and freed trade-account transactions from exchange control, an early step toward convertibility.
- August 1994. India accepted the obligations of Article VIII of the IMF’s Articles of Agreement. This made the rupee fully convertible on the current account.
- Article VIII Rules. A member accepting Article VIII cannot restrict payments for current international transactions. It also cannot run multiple exchange rates.
- Result. Since 1994, Indians can freely convert rupees for imports, exports, travel, and sending or receiving remittances.
Good to Know.
Capital Account Convertibility, Still Only Partial.
How India Manages Capital Flows Today.
- No Full CAC. India has never adopted full capital account convertibility. It instead liberalises capital flows in stages, under RBI oversight.
- Liberalised Remittance Scheme. Under the LRS, resident individuals can send up to $250,000 a year abroad for approved current and capital purposes.
- FDI and FPI. Foreign direct and portfolio investment into India have been progressively opened up, sector by sector, rather than all at once.
- Why the Caution. Full CAC exposes an economy to large, fast capital swings. A sudden outflow can destabilise the exchange rate and financial system.
Test Yourself.
Great to Know.
The Tarapore Committees.
Two Roadmaps, Both Shelved.
- Tarapore Committee I (1997). The RBI set up a committee under former Deputy Governor S.S. Tarapore to chart a path to full CAC.
- Its Roadmap. The committee proposed three phases, aiming for full CAC by 1999-2000. It set fiscal and inflation preconditions first.
- The Preconditions. The gross fiscal deficit had to fall from a budgeted 4.5% of GDP in 1997-98 to 3.5% by 1999-2000. Inflation had to stay between 3-5%.
- Derailed. The 1997 Asian Financial Crisis struck soon after the report. The roadmap was shelved, not implemented.
- Tarapore Committee II (2006). The RBI revisited the question. Its report, released on 1 September 2006, set a fresh five-year, three-phase roadmap.
- New Target. This second roadmap aimed for fuller capital account convertibility by 2011. It, too, was not fully carried out.
2015: A Fresh Push for Full Convertibility.
- Rajan’s Remark. On 10 April 2015, RBI Governor Raghuram Rajan told a convocation at the Gokhale Institute, Pune, that he hoped India would reach full capital account convertibility “in a short number of years.”
- Sinha’s Push. Days later, in mid-April 2015, Minister of State for Finance Jayant Sinha separately argued for full rupee convertibility, saying it was needed for India to rank among the world’s top economies.
- Still Unmet. Both remarks came months before this topic was tested in the August 2015 UPSC exam. Full capital account convertibility still has not arrived, even a decade later.
UPSC 2015 Prelims.
Previous Year Question.
Asked as: “Convertibility of rupee implies” (UPSC CSP 2015, GS Paper I).
Related reading: for how convertibility fits into India’s wider trade and payments picture, see Economy0008 — International Trade and Balance of Payments. For a deeper look at the Tarapore Committee’s own roadmap, see IndEco0136 — The Tarapore Committee and Capital Account Convertibility.
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