What is capital account convertibility? Is India ready for this yet?



RBI Deputy Governor T Rabi Shankar recently stirred political halls with a debate on capital account convertibility. Speaking at an industry event, he said there was an effort to further liberalize REIT debt flows with the introduction of the Fully Accessible Road, which places no limits on investments by non-residents in specified benchmarks.

But what does the convertibility of the capital account mean?

Simply put, a capital account keeps a record of all asset-related transactions between India and other countries.

This includes all kinds of investment assets like stocks, debt and property, or even business assets.

Currently India has a partially convertible capital account policy. Indeed, an individual or high net worth investor wishing to invest outside India can invest in an aggregate limit of $ 250,000 per fiscal year under the liberalized transfer program for any authorized transaction on the current account or in capital or a combination. both. This means that they can invest up to $ 500,000 in a calendar year.

The scheme, however, is not available for businesses, partnership companies, HUFs, trusts, etc.

Therefore, if India removes this limit on capital account transactions, we would have a fully convertible account, ideally increasing the exit limits for HNIs.

Now, before we get to the likely impact of the move, let’s understand why the RBI would want to remove capital account restrictions.

A fully convertible capital account offers three key advantages. These are stock returns, reducing transaction costs through free convertibility of the rupee, and improving savings and investments that effectively accelerate growth.

In this context, Aditi Nayar, Chief Economist at ICRA, says this while assessing India’s position on the conversion front and what the impact of this decision might be.

  • Government and RBI strive to include India in global bond indices
  • India Liberalizes G-sec Investment Standards
  • India could register inflows of $ 20 billion per year
  • The rupee could depreciate

That said, Gaurang Shah, senior vice president of Geojit Financial Services, warns against too much money for too few asset classes:

  • Must be done gradually
  • India must have checks and balances in place
  • Keeping a check on bad money (influx) difficult under full CAC
  • Considering the macro recovery, we can see access REIT entries
  • Avoiding too much money for too few asset classes

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