Capital account convertibility and capital controls
1. www.sanjivanimba.org.inwww.sanjivanimba.org.inDept. of MBA, Sanjivani COE, Kopargaon
308FIN-INTERNATIONAL FINANCE
Dr. Mital Bhayani
Capital Account Convertibility and Capital Controls
1
SanjivaniCollegeofEngineering,Kopargaon
DepartmentofMBA
www.sanjivanimba.org.in
2. www.sanjivanimba.org.inwww.sanjivanimba.org.inDept. of MBA, Sanjivani COE, Kopargaon
At the End of this video you should be able to:
ü Explain the meaning of capital account convertibility
ü Describe the Role of capital controls in emerging markets
ü To appreciate the preconditions necessary before capital account
convertibility is introduced.
Session Learning Outcome
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- Freedom to convert domestic
currency into foreign currency is
called as currency convertibility.
(Rupee Convertibility in India)
- BOP : Current A/c and Capita A/c
- We have complete convertibility on
Current A/c.
- When this freedom is granted for
capital account transaction it is
called as CAC(Capital Account
Convertibility)
v Fuller Capital account Convertibility
Capital Account Convertibility
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• Weak Domestic financial system
• Free international capital flows
• Booming economies with nominal fixed
exchange rate brought about real appreciation
in currency leading to slow down of economy.
• Credit Booms turned into credit crunch
“ Combination of weak domestic financial system
with open financial markets will lead to crisis”
Asian Currency Crisis (Thailand, Indonesia, Korea, Malaysia, Philippines,
Russia etc)
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• Strengthening domestic financial system and corruption less political
system
• Low Fiscal deficit
• Low Inflation
• Stable exchange rates
• Low NPAs
• Adequate Forex Reserves
• Current Account deficits should be low
• Debt Servicing ratio should be low
• Encourage long term bond investments, equity and FDI
• Discourage short term investments which can be reversed overnight
Preconditions for Complete Capital Account Convertibility