Write a short note on convertibility of rupee and define currency convertibility cc

 

 

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Convertibility of Rupee

 

Definition:

 

Convertibility of the rupee refers to the freedom to convert Indian currency (INR) into foreign currencies and vice versa without restrictions. It allows free movement of capital and trade between India and the rest of the world.

 

Types in India:

 

1. Current Account Convertibility (Introduced in 1994)

 

Allows conversion for trade-related and non-capital transactions like:

 

Imports/Exports

 

Travel expenses

 

Education abroad

 

Remittances

 

 

 

 

2. Capital Account Convertibility (Partial as of now)

 

Refers to the freedom to convert currency for investment and capital transactions, such as:

 

Buying property abroad

 

Investing in foreign stocks or companies

 

Foreign Direct Investment (FDI)

 

 

 

 

 

India currently follows partial capital account convertibility, controlled and regulated by the Reserve Bank of India (RBI).

 

 

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Currency Convertibility (CC)

 

Definition:

 

Currency convertibility refers to the ease with which a country’s currency can be freely exchanged for another currency without government restrictions.

 

Types of Currency Convertibility:

 

1. Full Convertibility:

No restrictions on both current and capital account transactions (e.g., US Dollar, Euro).

 

 

2. Partial Convertibility:

Free for current account; restricted for capital account (e.g., Indian Rupee).

 

 

3. Non-convertible Currency:

Not freely exchangeable; requires government approval (e.g., North Korean won).

 

 

 

 

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Importance of Rupee Convertibility:

 

Promotes foreign trade and investment

 

Improves global integration

 

Enhances efficiency in currency markets

 

Attracts foreign capital inflows

 

 

 

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Conclusion:

 

The convertibility of the rupee is an important step towards liberalization and globalization. While India has achieved full current account convertibility, capital account convertibility remains selectively controlled, ensuring economic stability and protection from speculative shocks.