India has been relentlessly moving on the path towards liberalization, opening up its markets and loosening its controls over many economic matters so as to integrate with the global economy.
Despite the opposition to globalization from some quarters, India has been quite watchful in its approach to embracing global economy. The issue of capital account convertibility is one such where the nation has tread very cautiously.
A high-level committee to look into this matter, appointed by the Reserve Bank of India, on Friday recommended that India move to fuller capital account convertibility over the next five years and has laid down the roadmap for the move.
So what is capital account convertibility?
To put is simply, capital account convertibility (CAC) — or a floating exchange rate — means the freedom to convert local financial assets into foreign financial assets and vice versa at market determined rates of exchange. This means that capital account convertibility allows anyone to freely move from local currency into foreign currency and back.
It refers to the removal of restraints on international flows on a country’s capital account, enabling full currency convertibility and opening of the financial system.