Ans1:
Capital Account Convertibility (CCA) is the facet of a country's financial system which allows for the conversion of foreign financial assets into domestic financial assets and vice versa at market determined rates. Such convertibility may be completely unrestricted or may be partially regulated.
The main advantage of full CCA are:
(1) It will help India deepen its market and help India attain the status of a leading global economy.
(2) Improved access to international financial markets and reduction in cost of capital.
(3) This will open Indian financial markets to global competition and would in the long run contribute to the development.
(4) This will ensure the availability of large funds to supplement domestic resources and thus promote economic growth.
On the downside:
(1) Full CCA can lead to erratic flow of foreign capital, which can lead to financial instability.
(2) In today's globalised context, such close integration will open up the Indian economy to the global shocks like the 2008 financial crisis.
It is clear that the advantages of full CAA are broadly beneficial. However, given the underdeveloped state of the Indian financial ecosystem to face volatility risks associated with full CAA, adoption of partial CAA is more prudent and practical. The advantage of this approach is that the government can by way of regulatory mechanism come to the economy's rescue in turbulent times, while the economy enjoys the benefits associated with full CAA during the relatively calmer times. The downside of partial CAA is the speed and scale at which capital will flow into India. However, this is a small price to pay for ensuring some semblance of stability within the economy, while the institutional forces work to strengthen the framework for subsequent introduction of full accountability.
Ans2:
Capital Account Convertibility refers to the ability to transact local financial assets into foreign financial assets and vice-versa freely and at market determined exchange rates.This theory,to enable third world economies to grow as globalised economies,was proposed by the Tarapore Committee setup by the RBI.
Preconditions :
CAC shall be introduced in an economy only when there is low inflation,low fiscal deficit,low NPAs,high Forex Reserves,functional independence of the Central Bank,no restrictions on Gold movement.
Advantages :
1. Availability of large funds by improved access to international financial markets
2. Reduction in cost of capital
3. Incentive for Indians to acquire and hold international securities and assets
4. Greater financial competitiveness
5. External commercial borrowing without RBI or Govt approval
6. Indian residents can hold and transact foreign currency denominated deposits with Indian banks
7. Certain class of financial institutions and later NBFCs can access global financial market
8. Banks and financial institutions can trade in Gold globally and issue loans
Disadvantages :
1.Market determined exchange rates being higher than officially fixed exchange rates can rise import prices and cause Cost-push inflation
2.Improper management of CAC can lead to currency depreciation and affect trade and capital flows
3.The advantages have been found to be short lived as per studies and also International financial institutions are skeptical about CAC post 2008 crisis.
4.Speculative activity can lead to capital flight from country as in case of some South East Asian economies during 1997-98
5.Imposing control would become difficult in a globalised environment once CAC is introduced
The RBI and SEBI are making regulations to introduce CAC and the proposed Financial SEZ GIFT is said to first avail it in India.Though this could enable corporates to raise foreign currency loans and increase trade and investment as per Make in India policy,the necessary preconditions shall be seen to be met before its hasty introduction in order to make an effective and safe use of CAC.
Ans3:
Capital account convertibility, capital asset liberation is a feature of a nation's financial regime that centers on the ability to conduct transactions of local financial assets into foreign financial assets and vice versa at market determined exchange rates with two options- either fully or partially
India has adopted partial system and it is being considered disadvantageous duo to following reasons:-
1. Fully convertibility will help address issues of current account deficit and trade imbalances on real time basis and substantial scale as removal of regulatory oversight impedes the inflows
2. It will help in attracting vital foreign capital.much needed for investment and growth and considering huge gap in funding,it is wise to allow free flow of capital than to bank on expensive borrowing
3. It is right time to attract global flow of capital in aftermath of 2008 crisis,and fully convertibility is prerequisite for it,many nations have adopted it and gained substantially
Opponents are against fully convertibility as :-
1. Volatile nature of capital will bring instability in financial system as flow will be unregulated
2. Much advocated flow will be in form of hoarding and quick gains by investment in secondary market and it will be hurt genuine investors as bottlenecks of economy impede FDI and stable capitals
3. Financial crisis as witnessed in east Asian countries in 1997 was averted in India because we stayed from fully convertibility,2008 crisis again cautions against it
4. weak institutional and regulatory framework will add to black money cause only and illegal gains will be hard to prevent
In present scenario,cons outweigh pros and it will be wise to stick to partial CAA albeit with more reforms while simultaneously acting on several fronts such as removing bottlenecks of economy to attract genuine and long term capital
The main advantage of full CCA are:
(1) It will help India deepen its market and help India attain the status of a leading global economy.
(2) Improved access to international financial markets and reduction in cost of capital.
(3) This will open Indian financial markets to global competition and would in the long run contribute to the development.
(4) This will ensure the availability of large funds to supplement domestic resources and thus promote economic growth.
On the downside:
(1) Full CCA can lead to erratic flow of foreign capital, which can lead to financial instability.
(2) In today's globalised context, such close integration will open up the Indian economy to the global shocks like the 2008 financial crisis.
It is clear that the advantages of full CAA are broadly beneficial. However, given the underdeveloped state of the Indian financial ecosystem to face volatility risks associated with full CAA, adoption of partial CAA is more prudent and practical. The advantage of this approach is that the government can by way of regulatory mechanism come to the economy's rescue in turbulent times, while the economy enjoys the benefits associated with full CAA during the relatively calmer times. The downside of partial CAA is the speed and scale at which capital will flow into India. However, this is a small price to pay for ensuring some semblance of stability within the economy, while the institutional forces work to strengthen the framework for subsequent introduction of full accountability.
Ans2:
Capital Account Convertibility refers to the ability to transact local financial assets into foreign financial assets and vice-versa freely and at market determined exchange rates.This theory,to enable third world economies to grow as globalised economies,was proposed by the Tarapore Committee setup by the RBI.
Preconditions :
CAC shall be introduced in an economy only when there is low inflation,low fiscal deficit,low NPAs,high Forex Reserves,functional independence of the Central Bank,no restrictions on Gold movement.
Advantages :
1. Availability of large funds by improved access to international financial markets
2. Reduction in cost of capital
3. Incentive for Indians to acquire and hold international securities and assets
4. Greater financial competitiveness
5. External commercial borrowing without RBI or Govt approval
6. Indian residents can hold and transact foreign currency denominated deposits with Indian banks
7. Certain class of financial institutions and later NBFCs can access global financial market
8. Banks and financial institutions can trade in Gold globally and issue loans
Disadvantages :
1.Market determined exchange rates being higher than officially fixed exchange rates can rise import prices and cause Cost-push inflation
2.Improper management of CAC can lead to currency depreciation and affect trade and capital flows
3.The advantages have been found to be short lived as per studies and also International financial institutions are skeptical about CAC post 2008 crisis.
4.Speculative activity can lead to capital flight from country as in case of some South East Asian economies during 1997-98
5.Imposing control would become difficult in a globalised environment once CAC is introduced
The RBI and SEBI are making regulations to introduce CAC and the proposed Financial SEZ GIFT is said to first avail it in India.Though this could enable corporates to raise foreign currency loans and increase trade and investment as per Make in India policy,the necessary preconditions shall be seen to be met before its hasty introduction in order to make an effective and safe use of CAC.
Ans3:
Capital account convertibility, capital asset liberation is a feature of a nation's financial regime that centers on the ability to conduct transactions of local financial assets into foreign financial assets and vice versa at market determined exchange rates with two options- either fully or partially
India has adopted partial system and it is being considered disadvantageous duo to following reasons:-
1. Fully convertibility will help address issues of current account deficit and trade imbalances on real time basis and substantial scale as removal of regulatory oversight impedes the inflows
2. It will help in attracting vital foreign capital.much needed for investment and growth and considering huge gap in funding,it is wise to allow free flow of capital than to bank on expensive borrowing
3. It is right time to attract global flow of capital in aftermath of 2008 crisis,and fully convertibility is prerequisite for it,many nations have adopted it and gained substantially
Opponents are against fully convertibility as :-
1. Volatile nature of capital will bring instability in financial system as flow will be unregulated
2. Much advocated flow will be in form of hoarding and quick gains by investment in secondary market and it will be hurt genuine investors as bottlenecks of economy impede FDI and stable capitals
3. Financial crisis as witnessed in east Asian countries in 1997 was averted in India because we stayed from fully convertibility,2008 crisis again cautions against it
4. weak institutional and regulatory framework will add to black money cause only and illegal gains will be hard to prevent
In present scenario,cons outweigh pros and it will be wise to stick to partial CAA albeit with more reforms while simultaneously acting on several fronts such as removing bottlenecks of economy to attract genuine and long term capital
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