Rupee Convertibility: Current and Capital Account

1.1 What does a convertible rupee mean?

You can swap a convertible currency for foreign money. No official limit stops you. There are two kinds.

Current account convertibility covers everyday payments like trips abroad, gifts and study. Capital account convertibility means converting local financial assets into foreign ones, and back, at market-determined rates.

2.1 What happened in 1991 and 1992?

In July 1991 the rupee was adjusted downward in two steps, by 9 and 11 percent, between 1 and 3 July. This marked the start of reforms.

The Liberalised Exchange Rate Management System began in March 1992. It used a dual exchange rate for a short time.

2.2 When did the two rates become one?

The dual rate was replaced by a unified exchange rate in March 1993. Demand and supply of foreign exchange now set the rupee’s price.

2.3 When did the rupee become convertible on the current account?

In August 1994 India formally accepted Article VIII of the IMF’s Articles of Agreement. That meant India had adopted current account convertibility.

Some controls stayed. They still apply to money sent abroad for investment.

3.1 What did the Tarapore Committee of 1997 say?

The RBI set up the Committee on Capital Account Convertibility in May 1997. S. S. Tarapore chaired it.

It set three preconditions before opening the capital account.

First, cut the gross fiscal deficit from 4.5 percent of GDP in 1997-98 to 3.5 percent in 1999-2000.

Second, keep inflation in a 3 to 5 percent band. The RBI should get independence to do this.

Third, make banks stronger. Free interest rates, cut bad loans and lower cash reserve ratios.

3.2 Did a second Tarapore Committee follow?

Yes. A second committee under S. S. Tarapore reported in 2006. It recommended fuller capital account convertibility in three phases.

It wanted a full review at the end of 2010-11. It also wanted a higher yearly limit for foreign accounts abroad. The limit would go from $25,000 to $50,000, then $100,000.

4.1 What is the Liberalised Remittance Scheme?

Under the Liberalised Remittance Scheme (LRS), a resident individual can remit up to $250,000 each financial year. The RBI raised the cap from $125,000 to $250,000 in 2015.

The money can go to any allowed purpose. Amounts above the cap need RBI permission.

The scheme is for resident individuals only. Companies, firms, HUFs and trusts cannot use it.

5.1 Is the rupee fully convertible?

No. It has been convertible on the current account since August 1994. On the capital account, controls still apply to residents and companies sending money abroad.

The answer is (c). Convertibility means freely exchanging the rupee for other currencies and back.

The other options are traps. Gold conversion, a market-fixed value and a currency market are different ideas.