Definition
Capital Account Convertibility
Capital account convertibility is the freedom to convert local financial assets into foreign assets and back at market rates without restriction, which India only allows partially.
India has full current account convertibility (for trade and remittances) but only partial capital account convertibility, meaning cross-border investment flows face limits like the Liberalised Remittance Scheme cap and rules on foreign borrowing.
The Tarapore Committees laid out a roadmap toward fuller convertibility, contingent on fiscal discipline and low inflation. Caution stems from the risk that fully open capital flows could amplify volatility and complicate exchange-rate management under the impossible trinity.
Related terms
- Non-Deliverable Forward (NDF)An NDF is a cash-settled offshore currency forward where no actual exchange of the underlying currency occurs, used to trade or hedge restricted currencies like the rupee.
- Trilemma (Impossible Trinity)The impossible trinity states that a country cannot simultaneously have a fixed exchange rate, free capital movement and an independent monetary policy; it can pick only two.
- Liberalised Remittance Scheme (LRS)The Liberalised Remittance Scheme is an RBI facility allowing resident individuals to remit money abroad up to an annual limit for permitted current and capital account transactions.
- Balance of Payments (BoP)The balance of payments records all economic transactions between India and the rest of the world over a period, spanning trade, services, income and capital flows.
Plain-English explainer from The Dispatch Investors Encyclopedia. General information, not financial advice.