A currency is said to be convertible if its older can convert it at any time into gold or any other generally acceptable foreign currency at a predetermined fixed rates, without any restriction from RBI.
Current A/c Convertibility:
- Full convertibility on current a/c was achieved/introduced on 19th Aug, 1994, which makes it mandatory on a member to have no inward or outward restriction on current account & trade related transactions.
- Current A/c convertibility allows free inflows & outflows for all purposes other than for capital purposes such as investments & loans. In other words, it allows residents to make & receive trade-related payments – receives dollar (or any other currency) for export of goods & services & pay dollars for import of goods & services, make sundry remittance, access foreign currency for travel, studies abroad, medical treatment & gifts etc.
Capital A/c Convertibility:
- It means the freedom to convert local financial assets into foreign financial assets & vice versa at market determined rates of exchange.
- It refers to the removal of restraints on international flows in a country’s capital a/c, enabling full currency convertibility & opening of the financial system.
- Capital A/c convertibility is considered to be one of the major features of a developed country.
- It helps attract foreign investment.
- At the same time, capital a/c convertibility make it easier for domestic companies to tap the foreign market.
- It is sometimes referred to as Capital Asset Liberation.
- It implies freedom to citizens to buy & sell foreign currency & utilize it for defined purpose.
- It means that resident can convert their rupee savings into dollar over the counter & sell assets held in India & remit the proceeds overseas to acquire assets in foreign currency.
- RBI has allowed numbers of relaxation during the last couple of years.