Currency Convertibility: Indian and Global Experiences

Currency convertibility, as an aspect of a country’s exchange rate policy, refers to the ease with which domestic currency can be traded for foreign currency, for a particular usage and at a given exchange rate. Currency convertibility policy of a government has two aspects: (a) current account convertibility and (b) capital account convertibility. Current account convertibility allows residents to make and receive trade-related payments, i.e. receive foreign currency for export of goods and services and pay foreign currency for import of goods and services like travels, medical treatment and studies abroad. In other words, it permits free inflows and outflows for all purposes other than for capital purposes. Capital account convertibility allows freedom to make investment in foreign equity, extend loans to foreigners, buy real estate in foreign lands and vice versa. Broadly speaking, it allows anyone to move freely from local currency into foreign currency and back. Current account convertibility was introduced in India in August 1994 with the acceptance of the obligations under Article VIII of the IMF’s Articles of Agreement. This drastic measure contributed significantly to boost India’s exports. Presently, there is almost full convertibility on the current account and partial convertibility on the capital account. This book explains and examines various aspects of currency convertibility risks and their management. With focus on India, it discusses convertibility experiences of a number of Latin American Countries (Argentina, Brazil, Mexico, Chile, Colombia, Peru, Paraguay, Venezuela, Bolivia, and Ecuador) and selected countries of East and South-East Asia (Thailand, South Korea, Indonesia, Malaysia, and Philippines). The experiences of these countries, in a comparative perspective, will help to understand the requisites of a regime of sustainable convertibility.