Question

• B. Capital account convertibility is seen as the holy grail of financial sector reforms. In this context, discuss the basic criteria’s required for safe capital account convertibility?

Answer 1

Capital account convertibility is seen as holy grail as this will be helpful in conversion of a currency of domestic country into the foreign country without much restrictions and it will be helpful in high liquidity of the the money available in the country and it will also provide with higher level of transparency.this is generally applicable in case of contract of Indian economy which has allowed to transfer assets for its individual in foreign currency and it is also providing an incentive for foreign national to hold their assets in India and it is also providing an easy exchange rate mechanism.

Basic criteria which are required for safe capital account convertibility are-

A. Better regulation of foreign transactions and there should be proper reporting of higher transactions so that there will be lower risk.

B. There should be proper and efficient exchange market system which will be helpful in conversion of different currencies

C. Proper control on the hawala transaction is very important in order to locate the trail of money.

D. there should be promotion of foreign direct investments and they should be provided with various incentives also so it will help the Indian economy in order to attract higher foreign Investments

E. it will also provide with an incentive for Indian national to hold assets in other countries so these Indian nationals would be properly audited with their money who are investing higher amounts in other countries in order to have better source of money available which are not related to money laundering.