DMPQ-. Discuss the advantages and downsides of capital account convertibility.

. Capital account convertibility means ability to convert the foreign exchange in to Indian rupees and vice versa on account of all capital transactions at a rate determined by the free flow of market and not by a country’s monetary controlling authority (RBI in India).

Advantages

  • Capital account convertibility allows free mobility of Capital into a country from the foreign investors. It allows to convert the foreign exchange brought into as Capital to convert into rupees at market determined rates , which makes the investors encouraging. It allows the foreign investors to easily move in and move our from an economy. This enables the domestic companies to raise funds from abroad.
  • Capital account convertibility allows the individuals of a nation to invest in abroad by easily converting their rupees into foreign exchange at the rates determined by the Market. This enables those potential domestic investors to acquire & own the assets in abroad.
  • One can easily invest in the equity and debt markets of another economies along side a reduction in the cost of capital.

Downsides

  • As it allows to convert any foreign receipt into Indian rupees at market determined rates there may be chance that domestic economy will be flooded with foreign exchange which in long run may damage the financial health of an economy.
  • During the times when the financial markets of an economy are doing good , a country may receive huge foreign investment. But during the adverse times the reverse scenario may happen. For example when the federal reserve Bank of America gave a sign that they are going increase the interest rates the foreign Institutional investors who invested their dollars in Indian stock market had with drawn their investment from India which adversely impacted the rupee value.

 

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