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CAPITAL ACCOUNT CONVERTIBILITY (CAC)

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CAPITAL ACCOUNT CONVERTIBILITY (CAC) - September 13th, 2010


CAPITAL ACCOUNT CONVERTIBILITY (CAC)

While there is no formal definition of Capital Account Convertibility, the committee under the chairmanship of S.S. Tarapore has recommended a pragmatic working definition of CAC.


Accordingly CAC refers to the freedom to convert local financial assets into foreign financial assets and vice – a – versa at market determined rates of exchange. It is associated with changes of ownership in foreign / domestic financial assets and liabilities and embodies the creation and liquidation of claims on, or by, the rest of the world.


CAC is coexistent with restrictions other than on external payments. It also does not preclude the imposition of monetary / fiscal measures relating to foreign exchange transactions, which are of prudential nature.


Following are the prerequisites for CAC:

1. Maintenance of domestic economic stability.

2. Adequate foreign exchange reserves.

3. Restrictions on inessential imports as long as the foreign exchange position is not very comfortable.

4. Comfortable current account position.

5. An appropriate industrial policy and a conducive investment climate.

6. An outward oriented development strategy and sufficient incentives for export growth.
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