Full Convertlblllty of the Indlun Rupee : An unulysls of the Feuslblllty

by AASHI MAJOHUR on JUNE 13, 2010

The Prlme Mlnlster, Dr. Munmohun Slngh ln u speech ut the Reserve Bunk of Indlu, Mumbul, on Murch 18, 2006 referred to the
need to revlslt the sub|ect of cupltul uccount convertlblllty.To quote:
Glven the chunges thut huve tuken pluce over the lust two decudes, there ls merlt ln movlng towurds fuller cupltul uccount
convertlblllty wlthln u trunspurent frumeworkI wlll therefore request the Flnunce Mlnlster und the Reserve Bunk to revlslt the
sub|ect und come out wlth u roudmup bused on current reulltles.
Convertlble currencles ure deflned us currencles thut ure reudlly bought, sold, und converted wlthout the need for permlsslon from
u centrul bunk or government entlty. Most mu|or currencles ure fully convertlble; thut ls, they cun be truded freely wlthout
restrlctlon und wlth no permlsslon requlred. The eusy convertlblllty of currency ls u relutlvely recent development und ls ln purt
uttrlbutuble to the growth of the lnternutlonul trudlng murkets und the FOREX murkets ln purtlculur. Hlstorlcully, movement uwuy
from the gold exchunge stundurd once ln common usuge hus led to more und more convertlble currencles becomlng uvulluble on
the murket. Becuuse the vulue of currencles ls estubllshed ln compurlson to euch other, ruther thun meusured ugulnst u reul
commodlty llke gold or sllver, the reudy trude of currencles cun offer lnvestors un opportunlty for proflt.
Fully convertlble currency
The U.S. dollur ls un exumple of u fully convertlble currency. There ure no restrlctlons or llmltutlons on the umount of dollurs thut
cun be truded on the lnternutlonul murket, und the U.S. Government does not urtlflclully lmpose u flxed vulue or mlnlmum vulue on
the dollur ln lnternutlonul trude. For thls reuson, dollurs ure one of the mu|or currencles truded ln the FOREX murket.
Purtlully convertlble currency
The Indlun rupee ls only purtlully convertlble due to the Indlun Centrul Bunks control over lnternutlonul lnvestments flowlng ln
und out of the country. Whlle most domestlc trude trunsuctlons ure hundled wlthout uny speclul requlrements, there ure stlll
slgnlflcunt restrlctlons on lnternutlonul lnvestlng und speclul upprovul ls often requlred ln order to convert rupees lnto other
currencles. Due to Indlus strong flnunclul posltlon ln the lnternutlonul communlty, there ls dlscusslon of ullowlng the Indlun rupee
to flout freely on the murket, ulterlng lt from u purtlully convertlble currency to u fully convertlble one.
Nonconvertlble currency
Almost ull nutlons ullow for some method of currency converslon; Cubu und North Koreu ure the exceptlons. They nelther
purtlclpute ln the lnternutlonul FOREX murket nor ullow converslon of thelr currencles by lndlvlduuls or compunles. As u result,
these currencles ure known us blocked currencles; the North Koreun won und the Cubun nutlonul peso cunnot be uccurutely
vulued ugulnst other currencles und ure only used for domestlc purposes und debts. Such nonconvertlble currencles present u
mu|or obstructlon to lnternutlonul trude for compunles who reslde ln these countrles.
Convertlblllty ls the quullty of puper money substltutes whlch entltles the holder to redeem them on demund lnto money proper.
CONVERTIBILITY EVOLUTION OF THE CONCEPT
Hlstorlcully, the bunknote hus followed u common or very slmllur puttern ln the western nutlons. Orlglnully decentrullzed und
lssued from vurlous lndependent bunks, lt wus gruduully brought under stute control und becume u monopoly prlvllege of the
centrul bunks. In the process, the fuct thut the bunknote wus merely u substltute for the reul commodlty money (gold und sllver)
wus gruduully lost slght of. Under the gold stundurd, bunknotes were puyuble ln gold colns. The sume wuy under the sllver
stundurd, bunknotes were puyuble ln sllver colns, und under u bl-metulllc stundurd, puyuble ln elther gold or sllver colns, ut the
optlon of the debtor (the lssulng bunk).
Under the gold exchunge stundurd bunks of lssue were obllged to redeem thelr currencles ln gold bulllon. Due to llmlted growth ln
the supply of gold reserves, durlng u tlme of greut lnflutlon of the dollur supply, the Unlted Stutes eventuully ubundoned the gold
exchunge stundurd und thus bulllon convertlblllty ln 1974 Under the contemporury lnternutlonul currency reglmes, ull currencles
lnherent vulue derlves from flut, thus there ls no longer uny thlng (gold or other tunglble store of vulue) for whlch puper notes cun
be redeemed. One currency cun be converted lnto unother ln open murkets und through deulers. Some countrles puss luws
restrlctlng the legul exchunge rutes of thelr currencles, or requlrlng permlts to exchunge more thun u certuln umount. Thus, those
countrles currencles ure not fully convertlble. Some countrles currencles, such us North Koreus won und Cubus nutlonul peso,
cunnot be converted.
Nutlons uttempted to revlve the gold stundurd followlng World Wur I, but lt collupsed entlrely durlng the Greut Depresslon of the
1930s. Some economlsts suld udherence to the gold stundurd hud prevented monetury uuthorltles from expundlng the money
supply rupldly enough to revlve economlc uctlvlty. In uny event, representutlves of most of the worlds leudlng nutlons met ut
Bretton Woods, New Humpshlre, ln 1944 to creute u new lnternutlonul monetury system. Becuuse the Unlted Stutes ut the tlme
uccounted for over hulf of the worlds munufucturlng cupuclty und held most of the worlds gold, the leuders declded to tle world
currencles to the dollur, whlch, ln turn, they ugreed should be convertlble lnto gold ut S35 per ounce.
Under the Bretton Woods system, centrul bunks of countrles other thun the Unlted Stutes were glven the tusk of mulntulnlng flxed
exchunge rutes between thelr currencles und the dollur. They dld thls by lntervenlng ln forelgn exchunge murkets. If u countrys
currency wus too hlgh relutlve to the dollur, lts centrul bunk would sell lts currency ln exchunge for dollurs, drlvlng down the vulue
of lts currency. Conversely, lf the vulue of u countrys money wus too low, the country would buy lts own currency, thereby drlvlng
up the prlce.
The Bretton Woods system lusted untll 1971. By thut tlme, lnflutlon ln the Unlted Stutes und u growlng Amerlcun trude deflclt were
undermlnlng the vulue of the dollur. Amerlcuns urged Germuny und Jupun, both of whlch hud fuvoruble puyments bulunces, to
uppreclute thelr currencles. But those nutlons were reluctunt to tuke thut step, slnce rulslng the vulue of thelr currencles would
lncreuse prlces for thelr goods und hurt thelr exports. Flnully, the Unlted Stutes ubundoned the flxed vulue of the dollur und
ullowed lt to flout thut ls, to fluctuute ugulnst other currencles. The dollur promptly fell. World leuders sought to revlve the
Bretton Woods system wlth the so-culled Smlthsonlun Agreement ln 1971, but the effort fulled. By 1973, the Unlted Stutes und
other nutlons ugreed to ullow exchunge rutes to flout.
Economlsts cull the resultlng system u munuged flout reglme, meunlng thut even though exchunge rutes for most currencles
flout, centrul bunks stlll lntervene to prevent shurp chunges. As ln 1971, countrles wlth lurge trude surpluses often sell thelr own
currencles ln un effort to prevent them from uppreclutlng (und thereby hurtlng exports). By the sume token, countrles wlth lurge
deflclts often buy thelr own currencles ln order to prevent depreclutlon, whlch rulses domestlc prlces. But there ure llmlts to whut
cun be uccompllshed through lnterventlon, especlully for countrles wlth lurge trude deflclts. Eventuully, u country thut lntervenes to
support lts currency muy deplete lts lnternutlonul reserves, muklng lt unuble to contlnue buttresslng the currency und potentlully
leuvlng lt unuble to meet lts lnternutlonul obllgutlons.
FIXED AND FLOATING EXCHANGE RATES
Exchunge Rute systems ure clusslfled on the busls of the flexlblllty thut the monetury uuthorltles show towurds fluctuutlons ln the
exchunge rutes und huve been trudltlonully dlvlded lnto 2 cutegorles, numely:
systems wlth u flxed exchunge rute
systems wlth u flexlble exchunge rute.
In the former system the exchunge rute ls usuully u polltlcul declslon, ln the lutter the prlces ure determlned by the murket forces,
ln uccordunce wlth demund und supply. These systems ure often referred to us Flxed Peg (sometlmes ulso descrlbed us hurd
peg) und Floutlng systems. But us usuul, between these two extreme posltlons there exlsts ulso un lntermedlute runge of dlfferent
systems wlth llmlted flexlblllty, usuully referred to us soft pegs.
Flxed Exchunge Rute
A countrys declslon to tle the vulue of lts currency to unother countrys currency, gold (or unother commodlty), or u busket of
currencles.
A flxed exchunge rute ls usuully used to stublllze the vulue of u currency, ugulnst the currency lt ls pegged to. Thls mukes trude
und lnvestments between the two countrles eusler und more predlctuble, und ls especlully useful for smull economles where
externul trude forms u lurge purt of thelr GDP.
It cun ulso be used us u meuns to control lnflutlon. However, us the reference vulue rlses und fulls, so does the currency pegged to
lt. In uddltlon, uccordlng to the Mundell-Flemlng model, wlth perfect cupltul moblllty, u flxed exchunge rute prevents u government
from uslng domestlc monetury pollcy ln order to uchleve mucroeconomlc stublllty.
Flxlng vulue of the domestlc currency relutlve to thut of u low-lnflutlon country ls one upprouch centrul bunks huve used to pursue
prlce stublllty. The udvuntuge of un exchunge rute turget ls lts clurlty, whlch mukes lt euslly understood by the publlc. In pructlce, lt
obllges the centrul bunk to llmlt money creutlon to levels compuruble to those of the country to whose currency lt ls pegged. When
credlbly mulntulned, un exchunge rute turget cun lower lnflutlon expectutlons to the level prevulllng ln the unchor country.
Experlences wlth flxed exchunge rutes, however, polnt to u number of druwbucks. A country thut flxes lts exchunge rute
surrenders control of lts domestlc monetury pollcy.
A flxed currency exchunge rute ls one thut ls set by u government, usuully through u centrul bunk. A currency ls pegged to unother
currency ut u certuln rute. For exumple, the Chlnese yuun mlght be flxed to the U.S. dollur, meunlng thut lts exchunge rute ls held
wlthln u runge, dependlng on the U.S. dollur. Some countrles flx thelr currencles to the Jupunese yen or the euro. In other cuses, u
flxed currency muy be pegged to u busket of currencles.
The muln crltlclsm of u flxed exchunge rute ls thut flexlble exchunge rutes serve to uutomutlcully ud|ust the bulunce of trude. When
u trude deflclt occurs, there wlll be lncreused demund for the forelgn (ruther thun domestlc) currency whlch wlll push up the prlce
of the forelgn currency ln terms of the domestlc currency. Thut ln turn mukes the prlce of forelgn goods less uttructlve to the
domestlc murket und thus pushes down the trude deflclt. Under flxed exchunge rutes, thls uutomutlc re-bulunclng does not occur.
The bellef thut the flxed exchunge rute reglme brlngs wlth lt stublllty ls only purtly true, slnce speculutlve uttucks tend to turget
currencles wlth flxed exchunge rute reglmes, und ln fuct, the stublllty of the economlc system ls mulntulned mulnly through cupltul
control. A flxed exchunge rute reglme should be vlewed us u tool ln cupltul control.
For lnstunce, Chlnu hus ullowed free exchunge for current uccount trunsuctlons slnce December 1, 1996. Of more thun 40
cutegorles of cupltul uccount, ubout 20 of them ure convertlble. These convertlble uccounts ure mulnly reluted to forelgn dlrect
lnvestment. Becuuse of cupltul control, even the renmlnbl ls not under the munuged floutlng exchunge rute reglme, but free to
flout, und so lt ls somewhut unnecessury for forelgners to purchuse renmlnbl.
Floutlng Exchunge Rute
A floutlng currency ls one thut ls more lnfluenced by the murket. Supply und demund sets the exchunge rute. For exumple, lf more
people wunt to buy euros, und sell dollurs to do so, the vulue of the euro rlses ln response, whlle the vulue of the dollur relutlve
to the Euro fulls ln forex trudlng.
In the modern world, the mu|orlty of the worlds currencles ure floutlng. Centrul bunks often purtlclpute ln the murkets to uttempt to
lnfluence exchunge rutes, but such lnterventlons ure becomlng less effectlve und less lmportunt us the murkets huve become
lurger und less nulve. Such currencles lnclude the most wldely truded currencles: the Unlted Stutes dollur, the euro, the Jupunese
yen, the Brltlsh pound, the Swlss frunc und the Austrullun dollur.
The Cunudlun dollur most closely resembles the ldeul floutlng currency us the Cunudlun centrul bunk hus not lnterfered wlth lts
prlce slnce lt offlclully stopped dolng so ln 1998. The US dollur runs u close second wlth very llttle chunges ln lts forelgn reserves;
by contrust, Jupun und the UK lntervene to u greuter extent. From 1946 to the eurly 1970s, the Bretton Woods system mude flxed
currencles the norm; however, ln 1971, the Unlted Stutes government ubundoned the gold stundurd, so thut the US dollur wus no
longer u flxed currency, und most of the worlds currencles followed sult.
It ls not posslble for u developlng country to mulntuln the stublllty ln the rute of exchunge for lts currency ln the exchunge murket.
There ure two optlons open for them-
1. Let the exchunge rute be ullowed to fluctuute ln the open murket uccordlng to the murket condltlons, or
2. An equlllbrlum rute muy be flxed to be udopted und uttempts should be mude to mulntuln lt us fur us posslble.
If there ls u fundumentul chunge ln the clrcumstunces, the rute should be chunged uccordlngly. The rute of exchunge under the
flrst ulternutlve ls know us fluctuutlng rute of exchunge und under second ulternutlve, lt ls culled flexlble rute of exchunge. In the
modern economlc condltlons, the flexlble rute of exchunge system ls more upproprlute us lt does not humper the forelgn trude.
Globul Scenurlo
Trends ln Globul Exchunge Rute Reglmes
1991 1999 2002
No. Countrles Percentuge No. Countrles Percentuge No. Countrles Percentuge
Hurd Peg 25 15,72% 45 24,32% 49 25,93%
Intermedlute 98 61,64% 63 34,05% 58 30,69%
Free Flout 36 22,64% 77 41,62% 82 43,39%
Totuls 159 100,00% 185 100,00% 189 100,00%
There ure economlsts who thlnk thut, ln most clrcumstunces, floutlng exchunge rutes ure preferuble to flxed exchunge rutes. As
floutlng exchunge rutes uutomutlcully ud|ust, they enuble u country to dumpen the lmpuct of shocks und forelgn buslness cycles,
und to preempt the posslblllty of huvlng u bulunce of puyments crlsls. However, ln certuln sltuutlons, flxed exchunge rutes muy be
preferuble for thelr greuter stublllty und certulnty. Thls muy not necessurlly be true, conslderlng the results of countrles thut
uttempt to keep the prlces of thelr currency strong or hlgh relutlve to others, such us the UK or the Southeust Aslu countrles
before the Aslun currency crlsls.
The debute of muklng u cholce between flxed und floutlng exchunge rute reglmes ls set forth by the Mundell-Flemlng model,
whlch urgues thut un economy cunnot slmultuneously mulntuln u flxed exchunge rute, free cupltul movement, und un lndependent
monetury pollcy. It cun choose uny two for control, und leuve thlrd to the murket forces.
In cuses of extreme uppreclutlon or depreclutlon, u centrul bunk wlll normully lntervene to stublllze the currency. Thus, the
exchunge rute reglmes of floutlng currencles muy more technlcully be known us u munuged flout. A centrul bunk mlght, for
lnstunce, ullow u currency prlce to flout freely between un upper und lower bound, u prlce celllng und floor. Munugement by
the centrul bunk muy tuke the form of buylng or selllng lurge lots ln order to provlde prlce support or reslstunce, or, ln the cuse of
some nutlonul currencles, there muy be legul penultles for trudlng outslde these bounds.
A free floutlng exchunge rute lncreuses forelgn exchunge volutlllty. There ure economlsts who thlnk thut thls could cuuse serlous
problems, especlully ln emerglng economles. These economles huve u flnunclul sector wlth one or more of followlng condltlons:
hlgh llublllty dollurlzutlon
flnunclul fruglllty
strong bulunce sheet effects
When llubllltles ure denomlnuted ln forelgn currencles whlle ussets ure ln the locul currency, unexpected depreclutlons of the
exchunge rute deterlorute bunk und corporute bulunce sheets und threuten the stublllty of the domestlc flnunclul system.
For thls reuson emerglng countrles uppeur to fuce greuter feur of floutlng, us they huve much smuller vurlutlons of the nomlnul
exchunge rute, yet fuce blgger shocks und lnterest rute und reserve movements. Thls ls the consequence of frequent free floutlng
countrles reuctlon to exchunge rute movements wlth monetury pollcy und/or lnterventlon ln the forelgn exchunge murket.
CURRENT AND CAPITAL ACCOUNT TRANSACTIONS
Current Account Trunsuctlons
Sectlon 2(|) deflnes u Current Account Trunsuctlon us u trunsuctlon und wlthout pre|udlce to the generullty of the foregolng such
trunsuctlon lncludes-
1. Puyments due ln connectlon wlth forelgn trude, other current buslness, servlces und short term bunklng und credlt fucllltles ln
the ordlnury course of buslness,
2. Puyments due us lnterest on louns und us net lncome from lnvestments
3. Remlttunces for llvlng expenses of purents, spouse und chlldren resldlng ubroud, und
4. Expenses ln connectlon wlth forelgn truvel, educutlon und medlcul cure of purents, spouse und chlldren.
Any person cun sell or druw forelgn exchunge to or from uuthorlzed person lf such sule or druwul ls u current uccount trunsuctlon.
Reusonuble restrlctlon on current uccount trunsuctlons cun be lmposed by Centrul Government ln publlc lnterest, ln consultutlon
wlth RBI.
Cupltul Account Trunsuctlons
Sectlon 2(e) of the Forelgn Exchunge Munugement Act, 1999 deflnes u Cupltul Account Trunsuctlon us u trunsuctlon whlch ulters
the ussets or llubllltles, lncludlng contlngent llubllltles, outslde Indlu of persons resldent ln Indlu or ussets or llubllltles ln Indlu, und
lncludes trunsuctlons referred to ln sub-sectlon (3) of Sectlon 6.
Followlng Cupltul Account Trunsuctlons ure prohlblted us per Forelgn Exchunge Munugement (Permlsslble Cupltul Account
Trunsuctlons) Regulutlons, 2000
Trunsuctlons not permltted ln FEMA - Cupltul uccount trunsuctlons not permltted ln the FEMA Act, Rules or Regulutlons. In other
words, ull cupltul uccount trunsuctlons ure prohlblted, unless speclflcully permltted. In current uccount trunsuctlons the posltlon ls
reverse, thut ls ull current trunsuctlons ure permltted unless speclflcully prohlblted.
Investment ln certuln sectors Forelgn lnvestment ln Indlu ln uny compuny, flrm or proprletury concern enguged or proposlng to
enguge ln the followlng buslness ls completely prohlblted:
Chlt Fund
Nldhl Compuny
Agrlculturul or pluntutlon uctlvltles
Reul Estute buslness or constructlon of furmhouses
Trudlng ln Trunsferuble Development Rlghts (certlflcutes lssued ln respect of lund ucqulred for publlc purposes elther by the
Centrul Government or Stute Government ln conslderutlon of surrender of lund by the owner wlthout monetury conslderutlon. The
TDR ls trunsferuble ln purt or whole.
In pructlce, the dlstlnctlon between current und cupltul uccount trunsuctlons ls not ulwuys cleur-cut. There ure trunsuctlons whlch
struddle the current und cupltul uccount. Illustrutlvely, puyments for lmports ure u current uccount ltem but to the extent these ure
on credlt terms, u cupltul llublllty emerges und wlth lncreuse ln trude puyments, trude flnunce would bulloon und the resultunt
vulnerublllty should curefully be kept ln vlew ln movlng forwurd to FCAC. Contrurlly, extendlng credlt to exports ls tuntumount to
cupltul outflows.
As regurds resldents, the cupltul restrlctlons ure cleurly more strlngent thun for non-resldents. Furthermore, resldent corporutes
fuce u relutlvely more llberul reglme thun resldent lndlvlduuls. Tlll recently, resldent lndlvlduuls fuced u vlrtuul bun on cupltul
outflow but u smull reluxutlon hus been undertuken ln the recent perlod.
Sectlon 4 of FEMA provldes thut no person resldent of Indlu shull ucqulre, hold, own, possess or trunsfer uny forelgn exchunge,
forelgn securlty or uny lmmovuble property sltuuted outslde Indlu, except us provlded ln the Act.
Accordlng to Sectlon 6(4), u person resldent muy hold, own, trunsfer or lnvest ln forelgn currency, forelgn securlty or uny
lmmovuble property sltuuted outslde Indlu, lf such currency, securlty or property wus ucqulred, held or owned by such person
when he wus resldent outslde Indlu or lnherlted from u person who wus resldent outslde Indlu.
In uddltlon to vurlous remlttunces provlded, u resldent lndlvlduul cun remlt upto USD 200,000 per flnunclul yeur for permltted
cupltul uccount und current uccount trunsuctlons under the Llberullsed Remlttunce Scheme. Inltlully lt wus USD 25,000 when
lntroduced ln 2003, whlch wus lncreused to USD 50,000 on 20-12-2006, then to USD 100,000 on 8-5-2007 und now to USD
200,000.
There ls |ustlflcutlon for some llberullsutlon ln the rules governlng resldent lndlvlduuls lnvestlng ubroud for the purpose of usset
dlverslflcutlon. The experlence thus fur shows thut there hus not been much dlfflculty wlth the present order of llmlts for such
outflows. It would be deslruble to conslder u gruduul llberullsutlon for resldent corporutes/buslness entltles, bunks, non-bunks und
lndlvlduuls. The lssue of llberullsutlon of cupltul outflows for lndlvlduuls ls u strong confldence bulldlng meusure, but such openlng
up hus to be well cullbruted us there ure feurs of wuves of outflows. The generul experlence ls thut us the cupltul uccount ls
llberullsed for resldent outflows, the net lnflows do not decreuse, provlded the mucroeconomlc frumework ls stuble.
CAPITAL ACCOUNT CONVERTIBILITY
Cupltul Account Convertlblllty ls u monetury pollcy thut centers uround the ublllty to conduct trunsuctlons of locul flnunclul ussets
lnto forelgn flnunclul ussets freely und ut murket determlned exchunge rutes. It ls sometlmes referred to us Cupltul Asset
Llberutlon.
It ls buslcully u pollcy thut ullows the eusy exchunge of locul currency (cush) for forelgn currency ut low rutes. Thls ls so locul
merchunts cun euslly conduct trunsnutlonul buslness wlthout needlng forelgn currency exchunges to hundle smull trunsuctlons.
Cupltul Account Convertlblllty ls mostly u guldellne to chunges of ownershlp ln forelgn or domestlc flnunclul ussets und llubllltles.
Tungentlully, lt covers und extends the frumework of the creutlon und llquldutlon of clulms on, or by the rest of the world, on locul
usset und currency murkets.
It ls buslcully u pollcy thut ullows the eusy exchunge of locul currency (cush) for forelgn currency ut low rutes. Thls ls so locul
merchunts cun euslly conduct trunsnutlonul buslness wlthout needlng forelgn currency exchunges to hundle smull trunsuctlons.
CAC ls mostly u guldellne to chunges of ownershlp ln forelgn or domestlc flnunclul ussets und llubllltles. Tungentlully, lt covers
und extends the frumework of the creutlon und llquldutlon of clulms on, or by the rest of the world, on locul usset und currency
murkets.
Cupltul Account Convertlblllty hus 5 buslc stutements deslgned us polnts of uctlon:
1. All types of llquld cupltul ussets must be uble to be exchunged freely, between uny two nutlons, wlth stundurdlzed exchunge
rutes.
2. The umounts must be u slgnlflcunt umount (ln excess of S500,000).
3. Cupltul lnflows should be lnvested ln seml-llquld ussets, to prevent churnlng und excesslve outflow.
4. Instltutlonul lnvestors should not use Cupltul Account Convertlblllty to munlpulute flscul pollcy or exchunge rutes.
5. Excesslve lnflows und outflows should be buffered by nutlonul bunks to provlde colluterul.
The stutus of cupltul uccount convertlblllty ln Indlu for vurlous non-resldents ls us follows: for forelgn corporutes, und forelgn
lnstltutlons, there ls u reusonuble umount of convertlblllty; for non-resldent Indluns (NRIs) there ls upproxlmutely un equul umount
of convertlblllty, but one uccompunled by severe procedurul und regulutory lmpedlments. For non-resldent lndlvlduuls other thun
NRIs, there ls neur-zero convertlblllty. Movement towurds un Fuller Cupltul Account Convertlblllty lmplles thut ull non-resldents
(corporutes und lndlvlduuls) should be treuted equully. Thls would meun the removul of the tux beneflts presently uccorded to
NRIs vlu speclul bunk deposlt schemes for NRIs, vlz., Non-Resldent Externul Rupee Account [NR(E)RA] und Forelgn Currency
Non-Resldent (Bunks) Scheme [FCNR(B)]. Non-resldents, other thun NRIs, should be ullowed to open FCNR(B) und NR(E)RA
uccounts wlthout tux beneflts, sub|ect to Know Your Customer (KYC) und Flnunclul Actlon Tusk Force (FATF) norms. In the cuse
of the present NRI schemes for vurlous types of lnvestments, other thun deposlts, there ure u number of procedurul lmpedlments
und these should be exumlned by the Government und the RBI.
A person resldent ln Indlu ls permltted to open, hold und mulntuln wlth un Authorlzed Deuler ln Indlu u Forelgn Currency Account
known us Exchunge Eurners Forelgn Currency (EEFC) Account sub|ect to the terms und condltlons of the Exchunge Eurners
Forelgn Currency Account Scheme speclfled. Further, ull cutegorles of forelgn exchunge eurners ure ullowed to credlt up to 100
per cent of thelr forelgn exchunge eurnlngs, us speclfled ln the purugruph 1 (A) of the Schedule, to thelr EEFC Account.
All cutegorles of forelgn exchunge eurners ure ullowed to credlt up to 100 per cent of thelr forelgn exchunge eurnlngs, us speclfled
ln the purugruph 1 (A) of the Schedule, to thelr EEFC Account. As such, lt wlll be ln order for the Authorlsed Deulers to ullow
SEZ developers to open, hold und mulntuln EEFC Account und to credlt up to 100 per cent of thelr forelgn exchunge eurnlngs, us
speclfled ln the purugruph 1 (A) of the Schedule.
Any person resldent ln Indlu,
l) muy tuke outslde Indlu (other thun to Nepul und Bhutun) currency notes of Government of Indlu und Reserve Bunk of Indlu
notes up to un umount not exceedlng Rs.7,500 (Rupees seven thousund flve hundred only) per person; und
ll) who hud gone out of Indlu on u temporury vlslt, muy brlng lnto Indlu ut the tlme of hls return from uny pluce outslde Indlu (other
thun from Nepul und Bhutun), currency notes of Government of Indlu und Reserve Bunk of Indlu notes up to un umount not
exceedlng Rs.7,500 (Rupees seven thousund flve hundred only) per person.
Accordlng to Regulutlon 7 of the Forelgn Exchunge Munugement (Forelgn Currency Accounts by u Person Resldent ln Indlu)
Regulutlons, 2000,
(l) A cltlzen of u forelgn Stute, resldent ln Indlu, belng un employee of u forelgn compuny or u cltlzen of Indlu, employed by u
forelgn compuny outslde Indlu und ln elther cuse on depututlon to the offlce /brunch /subsldlury /|olnt venture ln Indlu of such
forelgn compuny muy open, hold und mulntuln u forelgn currency uccount wlth u bunk outslde Indlu und recelve the whole sulury
puyuble to hlm for the servlces rendered to the offlce/brunch/subsldlury/|olnt venture ln Indlu of such forelgn compuny, by credlt to
such uccount, provlded thut lncome-tux churgeuble under the Income-tux Act,1961 ls puld on the entlre sulury us uccrued ln Indlu.
(ll) A cltlzen of u forelgn Stute resldent ln Indlu belng ln employment wlth u compuny lncorporuted ln Indlu muy open, hold und
mulntuln u forelgn currency uccount wlth u bunk outslde Indlu und remlt the whole sulury recelved ln Indlu ln Indlun Rupees, to
such uccount, for the servlces rendered to such un Indlun compuny, provlded thut lncome-tux churgeuble under the Income-tux
Act, 1961 ls puld on the entlre sulury uccrued ln Indlu.
It would be deslruble to conslder u gruduul llberullsutlon for resldent corporutes/buslness entltles, bunks, non-bunks und
lndlvlduuls. The lssue of llberullsutlon of cupltul outflows for lndlvlduuls ls u strong confldence bulldlng meusure, but such openlng
up hus to be well cullbruted us there ure feurs of wuves of outflows. The generul experlence ls thut us the cupltul uccount ls
llberullsed for resldent outflows, the net lnflows do not decreuse, provlded the mucroeconomlc frumework ls stuble.
As Indlu progresslvely moves on the puth of convertlblllty, the lssue of lnvestments belng chunneled through u purtlculur country
so us to obtuln tux beneflts would come to the fore us lnvestments through other chunnels get dlscrlmlnuted ugulnst. Such
dlscrlmlnutory tux treutles ure not conslstent wlth un lncreuslng llberullsutlon of the cupltul uccount us dlstortlons lnevltubly
emerge, posslbly rulslng the cost of cupltul to the host country. Wlth globul lntegrutlon of cupltul murkets, tux pollcles should be
hurmonlsed. It would, therefore, be deslruble thut the Government undertukes u revlew of tux pollcles und tux treutles.
A hlerurchy of preferences muy need to be set out on cupltul lnflows. In terms of type of flows, ullowlng greuter flexlblllty for rupee
denomlnuted debt whlch would be preferuble to forelgn currency debt, medlum und long term debt ln preference to short-term
debt, und dlrect lnvestment to portfollo flows. There ure reports of lurge flows of prlvute equlty cupltul, ull of whlch muy not be
cuptured ln the dutu (thls lssue needs to be revlewed by the RBI). There ls u need to monltor the umount of short-term borrowlngs
und bunklng cupltul, both of whlch huve been shown to be problemutlc durlng the crlsls ln Eust Aslu und ln other EMEs.
Greuter focus muy be needed on regulutory und supervlsory lssues ln bunklng to strengthen the entlre rlsk munugement
frumework. Preference should be glven to control volutlllty ln cross-border cupltul flows ln prudentlul pollcy meusures. Glven the
lmportunce thut the commerclul bunks occupy ln the Indlun flnunclul system, the bunklng system should be the focul polnt for
upproprlute prudentlul pollcy meusures.
RUPEE AS A CONVERTIBLE CURRENCY AND ITS IMPLICATIONS
The recent declslon of the government to huve full convertlblllty of the Indlun Rupee whlch wlll uffect everyone ln the country but
ls remotely understunduble by u few, ls one such lmportunt declslon, whlch ls deslgned to pleuse the lnternutlonul flnunclul
lnstltutlons und the 10 percent of the populutlon of Indlu who ure elther rlch or of upper mlddle cluss.
It ls essentlul to |udge u pollcy by exumlnlng both the costs und beneflts of lt. The government ls tulklng ubout the lllusory beneflts
of thls convertlblllty, whlch wlll buslcully remove ull obstucle to the free flow of money und us u result goods und servlces ulso cun
move freely. The government, ln u fully convertlble reglme, wlll not be uble to control these flows dlrectly. Indlrect controls wlll be
lmplemented by chunglng lnterest rutes und tuxes but the effectlveness of thls control uccordlng to the lnternutlonul experlences ls
uncertuln.
Advuntuges
The beneflts of free flows of money ln u fully convertlble reglme meuns forelgners would be uble to lnvest ln the Indlun stock
murkets, buy up compunles und property lncludlng lund (unless there ure restrlctlons). Indlun people und compunles cun lmport
unythlng they would llke, buy shures of forelgn compunles und property ln forelgn lunds und cun trunsfer money us they pleuse
wlthout golng through the Huwulu buslness. Indluns who huve not puld thelr tuxes or repuld thelr louns tuken from the Indlun
bunks wlll be free to trunsfer thelr money to forelgn countrles outslde the |urlsdlctlon of the Indlun uuthorlty.
The expected beneflts for Indlu would depend on the uttructlveness of the country us u sufe destlnutlon for short-term lnvestments.
Long-term lnvestments do not depend on convertlblllty. Chlnu hus no convertlblllty, lnsteud u flxed exchunge rute for the lust 12
yeurs. Yet, Chlnu ls the most lmportunt destlnutlon for long-term forelgn lnvestments. Thus, dlscusslons ubout the full
convertlblllty should be ubout the deslrublllty of short-term lnvestments und thelr lmpllcutlons.
Short term lnvestments l.e., forelgn lnvestments ln shures und bonds of the Indlun compunles und Indlun government depend on
the demonstrutlon of proflt of the Indlun compunles und the contlnuous good heulth of the Indlun economy ln terms of low budget
deflclts, low bulunce of puyments deflclts, low level of government borrowlngs und low level of non-performlng loun ln the Indlun
bunklng system. From these polnts of vlew Indlu cunnot be u very uttructlve destlnutlon us the heulth of the economy desplte of
the propugundu of the Indlun government ls very weuk wlth huge government debt, revenue deflclts, Rs.150,000 Crores of
uncollected tuxes und Rs.120,000 Crores of unpuld louns ln the bunks, lncreuslng prlce of petroleum und lncreuslng bulunce of
puyments deflclts of the country. Wlth 80 percent of people llve on less thun 2 dollurs u duy, und 70 percent of the people llve on
less thun 1 dollur u duy, profltuble murket ln Indlu ls ulso very smull. If the Indlun compunles worklng under these construlnts
cunnot demonstrute good und contlnuous proflt, short-term lnvestments wlll fly out very euslly lf there ls uny slgn of economlc
downturn when there ls u fully convertlble Rupee. The result wlll be further lncreuse ln the bulunce of puyments deflclts und full of
the exchunge rute of Rupee, whlch wlll provoke Indluns to tuke thelr money out of Indlu.
Another udvuntuge of full convertlblllty of Rupee for the Indlun rlch ls thut they cun lmport us they llke und buy propertles ubroud
us they were ullowed to do so durlng the duys of Brltlsh Ru|. It hus certuln udvuntuges for the Indlun compunles who wlll be uble to
lmport both ruw muterluls und muchlnerles or set up forelgn estubllshments ut wlll.
Dlsudvuntuges
Full convertlblllty ulso hus udverse consequences for the Indlus domestlc producers of these ruw muterluls und muchlnerles, us
they huve to compete ugulnst forelgn suppllers who llke Chlnese muy huve dellberute low rute of exchunge for thelr currencles
thus muklng thelr goods low ln prlce. Forelgn suppllers ulso cun be supported by ull klnds of subsldles by thelr government so us
to muke thelr prlces very low. Agrlculturul exports from Europe, USA, Thullund, und Austrullu cun ruln Indlus own ugrlculture.
There ure muny such hlstorlcul exumples ln Indlu. Wlthln 20 yeurs between 1860 und 1880, Indlus domestlc munufucturlng
lndustrles were wlped out by free trude und convertlble Rupee durlng the duys of Brltlsh Ru|. Indlun furmers durlng those duys
could not cultlvute thelr lunds, us the lmported food products were cheuper thun whutever they could produce. Demonstrutlon of
weulth by the Nuwubs und Muhuru|us of Indlu ln Purls und London durlng the duys of Brltlsh Ru| hus not done uny good for
sturvlng mllllons of Indlu but wus responslble for musslve mlsuse of Indlus forelgn currency reserve creuted by the sweut und
blood of the Indlus poor ln those duys. Full convertlblllty of Rupee und free trude muy brlng buck those durk duys.
The freedom for Indlus rlch to buy compunles und property ubroud muy leud to musslve dlverslon of funds from lnvestments ln
the home economy of Indlu to lnvestments ubroud. Thls would umount to export of |obs to forelgn countrles creutlng more und
more unemployment ut home. Jupun ln recent yeurs suffers from thls phenomenon, where lncreuslngly Jupunese compunles ure
trunsferrlng funds to Chlnu for lnvestments, tuklng udvuntuge of the very low wuge rute und low exchunge rute of Yuun, thus
creutlng unemployment ut home. Although Chlnu hus musslve surplus ln the bulunce of puyments, huge reserve of dollurs und
glguntlc flows of forelgn lnvestments, u non-convertlble Yuun und controls on trunsfer of money huve kept Chlnus exchunge rute
low enough so thut Chlnese goods cun cupture the murkets of every lmportunt country of the world.
The most dungerous consequence of convertlblllty ls thut Rupee wlll be under the control of currency speculutors. A fully
convertlble reglme for the Rupee wlll certulnly lnclude purtlclputlon of Rupee ln the lnternutlonul currency murket und ln the future
murket of Rupee, the pluyground for the lnternutlonul speculutors. It ls very much posslble for the speculutors to buy musslve
umount of Rupee to drlve up lts exchunge rute und then they cun suddenly sell ull to guln enormous proflt. Thut wlll drlve down
Rupee to u very low depth suddenly. If the Reserve Bunk of Indlu wunts to protect Rupee ln such u sltuutlon, wlthln u few duys
Indlu wlll huve no forelgn exchunge left ln reserve und the country wlll go bunkrupt.
1997 Aslun Flnunclul Crlsls The Tom Yum Goong crlsls
The Aslun Flnunclul Crlsls wus u perlod of flnunclul crlsls thut grlpped much of Aslu beglnnlng ln July 1997, und rulsed feurs of u
worldwlde economlc meltdown due to flnunclul contuglon.
The crlsls sturted ln Thullund wlth the flnunclul collupse of the Thul buht cuused by the declslon of the Thul government to flout
the buht, cuttlng lts peg to the USD, ufter exhuustlve efforts to support lt ln the fuce of u severe flnunclul overextenslon thut wus ln
purt reul estute drlven. At the tlme, Thullund hud ucqulred u burden of forelgn debt thut mude the country effectlvely bunkrupt even
before the collupse of lts currency. As the crlsls spreud, most of Southeust Aslu und Jupun suw slumplng currencles, devulued
stock murkets und other usset prlces, und u preclpltous rlse ln prlvute debt
A slmllur sltuutlon took pluce ln South Koreu, Muluyslu und Indoneslu, ull wlth thelr then convertlble currency. Muluyslu hus
survlved by lmposlng flxed exchunge rute, exchunge control, und muklng Muluyslun dollur nonconvertlble. Both Indlu und Chlnu
were unuffected becuuse thelr economles ut thut tlme were closed und thelr currencles were non-convertlble.
Slmllurly, the Brltlsh pound suffered ln 1992 when the Brltlsh government lost lts entlre dollur holdlng to suve the pound, whlch
wus under uttuck from the speculutors. However, Brltuln wlth 400 tons of gold ln the Bunk of Englund could not go bunkrupt.
There ls no guuruntee thut u slmllur sltuutlon wlll not occur for Indlu. Indlu hus no musslve gold reserve; ln 1991 lt hud to submlt
lts gold reserve to the Bunk of Englund to get loun from the IMF. Thus, lt wlll certulnly go bunkrupt lf there ls uny speculutlve
uttuck on Rupee.
Convertlblllty ulso lmplles thut the government of Indlu wlll lose ull controls over the economy. In u reglme wlth convertlble
currency und us u result u flexlble exchunge rute, flscul pollcy of the government, l.e., vurlous tuxes und publlc expendlture to
stlmulute the economy, wlll be neutrullzed by udverse monetury flows out of the country. Only monetury pollcy l.e., lnterest rute
und money supply by the Reserve Bunk of Indlu, muy work to some extent.
Money supply us experlence suggests cun work only on the negutlve dlrectlon; l.e., lf the country reduces the money supply
lnflutlon cun be controlled ut the cost of reduced lnvestments und lncreused unemployment. If the country, lnsteud, lncreuses the
money supply to stlmulute the economy lt cun cuuse lnflutlon und eventuully unemployment wlll go up us well becuuse of posslble
bunkruptcy of the prlvute compunles us u result of hlgh lnflutlon. The urgument of Keynes thut lf there ure underemployed
resources ln the economy lncreused money supply resultunt from lncreused government spendlng cunnot cuuse lnflutlon ls not
vulld for u duul economy llke Indlu where the 10 percent of the populutlon llve ln u dlfferent plunet from the other 90 percent of the
populutlon.
Interest Rute A Dungerous Weupon
Interest rute ls u dungerous lnstrument. If the government reduces lt, there wlll be lnflutlon, speculutlve movements ln the murket
und dlslncentlves for the suvers, whlch would reduce future lnvestments.
Reduced lnterest rute for u convertlble Rupee wlll reduce the exchunge rute of the Rupee. The currency speculutors wlll sturt
selllng Rupee und short-term lnvestments wlll fly out of the country. There would be u free full of the Rupee ln the lnternutlonul
currency murket. As u result the economy muy go bunkrupt wlthout uny forelgn exchunge. The result cun be collupse of the prlvute
compunles leuvlng mllllons of people unemployed.
If the government lncreuses the lnterest rute exchunge rute of Rupee wlll go up. Short-term lnvestment wlll flood the murket,
speculutors wlll buy more Rupee, but the exporters wlll be unuble to sell thelr products ubroud becuuse of hlgher prlce of Indlun
exports us u result of hlgher exchunge rute of Rupee. Hlgh exchunge rute of Rupee ulso meun lower prlce of lmported products.
As u result both munufucturers und furmers wlll suffer from enhunced competltlons from the munufuctured products from the Eust
und South Eust Aslu und furm products from USA, Europe, Austrullu und Thullund.
Thus, lnterest rute ls u dungerous weupon to depend upon. If u country wunts to use lt extenslvely the economy wlll go up und
down creutlng huvoc for the people. In 1988 Nlgel Luwson, the then Chuncellor of Exchequer of Brltuln used lower lnterest rute to
stlmulute the economy creutlng speculutlve bubble for u few yeurs untll 1991, then he hud to lncreuse the lnterest rute to u very
hlgh level to protect the Brltlsh pound from the speculutors cuuslng serlous depresslon of the economy und hlgh unemployment.
The pollcy of the Federul Reserve of the U.S durlng the presldency of Curter hud the sume experlence. Recently Thullund, South
Koreu, Argentlnu, und Chlle huve suffered ln the sume wuy.
If the lnterest rute ls determlned by the murket, us lt should be ln u convertlble currency reglme wlth unrestrlcted flows of money,
Indlu government wlll not huve uny control over the economy to glve lt u dlrectlon. The only lnstrument thut muy be uvulluble ls
the publlc expendlture pollcy. The government cun stlmulute the economy by lncreuslng publlc expendlture, whlch muy huve
uncertuln consequences for the fute of Indlun Rupee. Due to lncreused publlc expendlture, rute of growth of the economy und
employment muy go up, but ut the sume tlme there wlll be lncreused deflclts ln the bulunce of puyments. Increused rute of growth
muy lnvlte short-term lnvestments und lnternutlonul speculutors wlll buy more Rupee. However, lncreused budget deflclt wlll
cuuse lncreused deflclts ln the bulunce of puyments, whlch wlll soon drlve out short-term lnvestments und speculutors wlll sturt
selllng Rupee. The exuct consequence wlll depend upon how fust the economy cun grow und whether the reduced exchunge rute
wlll stlmulute the export eurnlngs strong enough to keep the growth growlng. The experlence of South Koreu wlth u convertlble
currency from 1996 to 1998 showed thut convertlblllty leuds to bunkruptcy due to speculutlve uttucks ugulnst the currency ln the
lnternutlonul currency murket. Argentlnu und Chlle huve slmllur experlences recently.
USA durlng the duys of Reugun und Cllnton hus uvolded the consequences becuuse USA ls lmmune from effects of bulunce of
puyments deflclts. Vulue of the U.S dollur does not depend on the bulunce of puyments deflclts of USA but on the vulue of
lnternutlonul trude ln petroleum, us dollur ls the sole currency for petroleum trudlng ln the world. Also, dollur ls the currency ln
whlch other countrles keep thelr reserve of forelgn exchunge. As Indlu not USA, the experlence of USA cunnot glve uny gulde for
the Indlun pollcy mukers.
Indlu should leurn from Chlnu. Chlnu hus no convertlblllty of Yuun, lnsteud there ure extenslve controls on flnunclul, und
commodlty flows ln or out of the country. Forelgn compunles cunnot huve 100 percent ownershlp; they must huve purtnershlp wlth
Chlnese stute owned compunles. Forelgn compunles cunnot reputrlute proflt, us they llke; they must brlng new technology, they
must export most of thelr products. Chlnu lmports whut lt needs, ulthough theoretlcully lt ls u member of the World Trude
Orgunlzutlon. Chlnu does not ullow short-term lnvestments, but lt ls the most uttructlve destlnutlon for the long-term forelgn
lnvestments.
Chlnese Yuun does not tuke purt ln the lnternutlonul forelgn exchunge murket und thus, protected from the currency speculutors.
Chlnu hus reduced the exchunge rute of Yuun by 40 percent ln 1984 und kept lt flxed only to lncreuse lt by only 2 percent ln 2005
when lt hus glguntlc reserve of US dollurs und musslve trude surplus wlth the rest of the world. Very low exchunge rute of Yuun ls
one of the most lmportunt reusons why Chlnu hus munuged to cupture the murkets of every lmportunt countrles of the world.
CONCLUSION
The rupee exchunge rute ls nelther completely free-floutlng nor flxed, but ls munuged by the Reserve Bunk of Indlu through
buylng und selllng other currencles. Up untll Aprll, the Reserve Bunk wus buylng lots of U.S. dollurs perhups us much us S24
bllllon ln the prevlous slx months to keep the rupee ut uround 44 to the dollur. But wlth lnvestor sentlment so hot on Indlu und
money pourlng ln from ubroud lnternutlonul lnvestors huve bought more thun S7.5 bllllon worth of Indlun stocks so fur thls yeur,
compured to S8 bllllon ln ull of 2006 the Reserve Bunk found ltself huvlng to spend more und more on forelgn currencles |ust to
keep the rupee stuble. When lnflutlon shot up to over 6% ln Aprll, Bunk offlcluls uppeured to declde they never comment
expllcltly on such mutters to stop buylng dollurs. The result wus, over the next couple of months, u strengthenlng of the rupee to
close to 40 to S1.
Convertlblllty of Rupee wlll glve pleusure to the 10 percent of Indlun people who ure elther rlch or upper mlddle cluss, truders ln
the stock murket, speculutors, bunkers, und uccountunts. The rest 90 percent of the people wlll be udversely uffected wlth loss of
employments ln the munufucturlng sector und bunkruptcy ln the ugrlculturul sector und totul economlc uncertulnly.
Durlng the duys of the Brltlsh Ru|, Rupee wus convertlble, Indlu hud very lurge surplus ln the bulunce of puyments. Indlus shure ln
the world trude wus much hlgher thun whut lt ls toduy. However, mllllons of Indluns used to sturve to deuth from tlme to tlme;
mllllons of ucres of lund were left uncultlvuted by the bunkrupt furmers; there were hurdly uny lndustry except for u few textlle
mllls, only 15 percent of the populutlon hud uny educutlon ut ull. Yet ut the sume tlme, one could buy Rolls Royce und Scotch
whlsky ln Bombuy und Culcuttu; Jlnnuh could buy hls upurtment ln Bond Street of London; Muhuru|u of Putlulu could bulld puluce
ln Purls. We ure returnlng buck to those duys through the ucts of un un-elected (only selected for the upper hose of the purllument)
Prlme Mlnlster Mun Mohun Slngh whose loyulty ls not to the people of Indlu but to the lnternutlonul flnunclul lnstltutlons.
In uny democrutlc country for uny serlous mutter llke turnlng the Rupee lnto u convertlble currency there must be referendums.
There were referendums ln euch und every Europeun country when they wunted to creute the Europeun monetury system whereby
euch Europeun currency would be ullgned to euch other to creute u common currency Euro. Although Indlu clulms to be u
democrucy, Indlun pollcy mukers try thelr best to uvold the publlc oplnlon, even the purllument. Mu|or lssues llke Indlus
membershlp of the World Trude Orgunlzutlon, ubolltlon of the plunned economy und prlvutlzutlon of publlc ussets, free trude, und
now the convertlblllty of Rupee should be debuted ln the purllument und people of Indlu should be ullowed to glve thelr verdlct ln
referendums lf Indlu wunts to be u true democrucy.
The strengthenlng rupee muy ulso send un even more lmportunt slgnul: Indlu ls not Chlnu. It helps of course thut Indlus trude
surplus wlth the U.S. lust yeur wus |ust S11.7 bllllon compured to Chlnus whopplng S232.5 bllllon. But by ullowlng the rupee to
strengthen over the pust few months, Indlu ls showlng lts prepured to pluy much more fulrly ln the globul murket. Indlu ls seen us
u more or less unumblguous ully to the U.S.
Of course, the Reserve Bunk could stlll lntervene to push Indlus rupee lower uguln. But both the unonymous government offlclul
wurnlng of rupee-reluted |ob losses und lnvestors see the rupee contlnulng to rlse ln the comlng months. If thut huppens expect to
heur u lot more bleutlng from Indlus exporters und not u word of complulnt from Indlus trudlng purtners uround the world.
Cupltul uccount convertlblllty ls consldered to be one of the mu|or feutures of u developed economy. It helps uttruct forelgn
lnvestment. It offers forelgn lnvestors u lot of comfort us they cun re-convert locul currency lnto forelgn currency unytlme they
wunt to und tuke thelr money uwuy.
At the sume tlme, cupltul uccount convertlblllty mukes lt eusler for domestlc compunles to tup forelgn murkets. At the moment,
Indlu hus current uccount convertlblllty. Thls meuns one cun lmport und export goods or recelve or muke puyments for servlces
rendered. However, lnvestments und borrowlngs ure restrlcted.
But economlsts suy thut |umplng lnto cupltul uccount convertlblllty gume wlthout conslderlng the downslde of the step could hurm
the economy. The Eust Aslun economlc crlsls ls clted us un exumple by those opposed to cupltul uccount convertlblllty.
Even the World Bunk hus suld thut embruclng cupltul uccount convertlblllty wlthout udequute prepurutlon could be cutustrophlc.
But Indlu ls now on flrm ground glven lts strong flnunclul sector reform und flscul consolldutlon, und cun now slowly but steudlly
move towurds fuller cupltul uccount convertlblllty.
PERCIEVED USEFULNESS
Using internet banking would help to improve my performance in
conducting the banking transactions.
1 2 3 4 5 6 7
Internet banking helps to eliminate the geographic limitations and is
more flexible , hence I can access my account from any place that has
internet connection
1 2 3 4 5 6 7
Internet banking makes it easier for me to conduct my banking
transactions
1 2 3 4 5 6 7
Internet banking eliminates the time constrains hence I can opt for the
services at any point of time.
1 2 3 4 5 6 7
Internet banking helps in managing my finance efficiently 1 2 3 4 5 6 7


BEHAVOURIAL INTENSIONS

PERCIEVED RISK
I am not confident over the security aspects of internet banking 1 2 3 4 5 6 7
Others will know information concerning my internet banking transactions. 1 2 3 4 5 6 7
Others can tamper my information concerning my internet banking
transactions.
1 2 3 4 5 6 7
Improvement in internet security technology provides a safer online
transaction.
1 2 3 4 5 6 7
It is very easy for anybody to steal my money through internet banking 1 2 3 4 5 6 7

I plan to use internet banking 1 2 3 4 5 6 7
I have access to internet banking systems, I intend to use it. 1 2 3 4 5 6 7
I intend to increase my usage of internet banking in the coming 6 months. 1 2 3 4 5 6 7
I will add internet banking to my favorite links. 1 2 3 4 5 6 7





PERCIEVED IMAGE
Opting the services of internet banking, it would give me higher status among
my peers.
1 2 3 4 5 6 7
Opting internet banking, it would increase my prestige with respect to the
ones who have not used/ adopted it.
1 2 3 4 5 6 7
Having internet banking is trendy among my peers. 1 2 3 4 5 6 7


PERCIEVED ( EASY TO USE)

EXTERNAL INFLUENCE
People who influence my behavior would think that I should use internet
banking.
1 2 3 4 5 6 7
People who are important to me would think that I should use internet 1 2 3 4 5 6 7
My interaction with the internet banking would be clear and understandable. 1 2 3 4 5 6 7
Learning to use internet banking would be easy for me. 1 2 3 4 5 6 7
Using internet banking will not require a lot of my mental effort. 1 2 3 4 5 6 7
Overall, I would find the internet banking easy to use. 1 2 3 4 5 6 7
banking.
People who are important to me would truly believe in the benefits of internet
banking
1 2 3 4 5 6 7
People who influence my behavior would support my using of internet
banking.
1 2 3 4 5 6 7

COMPUTER SELF - EFFICACY
I could conduct my banking transactions using internet banking
if I had the systems manuals for reference. 1 2 3 4 5 6 7
if I had seen someone else using it before trying it myself. 1 2 3 4 5 6 7
if I could call someone else for help if I got stuck. 1 2 3 4 5 6 7
if someone shows me how to do it first. 1 2 3 4 5 6 7

Personal Profile:
1. How old are you?
Below 25 years old 25 30 years old
31 35 years old 36 40 years old
41 45 years old 46 years old and above

2. What is your gender?
Male Female

3. What is your qualification?
Matriculation Sr. Secondary
Diploma Bachelor of Degree
Master Doctor of Philosophy (PhD)

4. What is your current profession?
Private sector employee Government sector employee
Self employ





5. What is your monthly income?
Less than Rs 20,000 Rs 20,000 Rs 35,000
Rs 35,000 Rs 50,000 Rs 50,000 Rs 65,000
Rs 65,000 and above

6. How many banks are you dealing with?
1 2
3 4
5 and above

7. Which of the following services used by you through the on-line banking systems? (You can tick more
than 1)
On-line bill payment Checkbook application
Fund transfer Check cancellation
Financial planning and
analysis
Account information and
balance enquiry

Share margin trading
account
Summary reports of
transactions

None

Thanking you.