its a presentation about convertability of currency

1. Currency and
Convertibility

2. The FOREX Market
 The FOREX market is where currencies are traded
 The market incorporates all arrangements used to buy and sell foreign
exchange (not a physical place but a network of telephones, emails
and faxes connecting all the large banks in the world).
 Volumes traded daily are huge: $3 trillion per day
 Most transactions involve exchange of $US for other currencies. In
large transactions, traders exchange one currency for $US and then
buy another currency with the dollar. The $US is thus called a
vehicle currency.

4. What Is An Exchange Rate?
The price of a nation’s currency in terms of another
currency.
It is the value of a currency measured against a foreign
currency
 An exchange rate thus has two components, the
domestic currency and a foreign currency

5. Exchange rates
The price determined in the FOREX market is the exchange rate.
 The exchange rate is the price of one country's currency measured in terms of
another country's currency. It converts values from one country’s unit of
measure (currency) to another country’s unit of measure (currency).
 When a currency becomes more valuable relative to another currency it has
appreciated. The price of foreign exchange has fallen (e.g, one $US buys
130 yen instead of 120 yen previously).
 When a currency becomes less valuable relative to other currencies, it has
depreciated. The price of foreign exchange has risen (e.g., $US buys 110
yen instead of 120 yen previously).

6. Exchange rate determination
 Demand and Supply. Exchange rates are determined by the
equilibrating interaction of buyers and sellers of currencies in
the FOREX market.
 Two of the most important factors affecting demand and
supply are relative inflation rates and relative interest rates.
 Differences in price levels are a crucial aspect of exchange
rates determination

7. How changes in currency values affect
the nation ?
Example: assume 2 countries (US, France), 2 currencies ($US, ff) and one traded good (men's shirts).
• Price Comparison:
– US-made shirts
– French-made shirts
$50
ff250
• Exchange rate: $1 = 5 francs.The PPP condition:
• Comparison shopping after the dollar depreciates ($1 = 4 francs)
• The exchange rate affects the price competitiveness of all traded goods– it is thus the single most
important price in an economy. It has a major impact on a country’s wealth.
US shopper prices French Shopper prices
US-made shirt $50 $50=ff200
French-made shirt ff250=$62.50 ff250
US Shopper prices French Shopper prices
US-made shirt $50 $50=ff250
French-made shirt ff250=$50 ff250

8. Currency Convertibility
What it is ?
Convertibility essentially means the ability of residents and non-
residents to exchange domestic currency for foreign currency,
without limit, whatever be the purpose of the transactions.
Types Of Currency Convertibility.
1. Fully convertible currency.
2. Partially convertible currency.
3. Non-convertible currency.

9. Non convertible Currency
Also known as a "blocked currency".
Any currency that is used primarily for domestic transactions and
is not openly traded on a forex market. This usually is a result of
government restrictions, which prevent it from being exchanged
for foreign currencies

10. Types of convertibility
Current Account
Capital Account

11. Current Account
Current account convertibility refers to freedom in respect of
Payments and transfers for current international transactions.
Transactions relating to:
- Exchange of goods and services
- Money transfers
In other words, if Indians are allowed to buy only foreign
goods and services but restrictions remain on the purchase of
assets abroad, it is only current account convertibility.

12. Current Account Transactions
• All imports and exports of merchandise.
• Invisible Exports and Imports (sale/purchase of services)
• Inward private remittances (to & fro)
• Pension payments (to & fro)
• Government Grants (both ways)

13. Capital account
• Inflows and Outflows of capital.
• Borrowing from or Lending to aboard.
• Sales and Purchase of securities aboard.

14. Capital Account Transactions
 Capital Direct Foreign Investments.
 Investment in securities.
 Other Investments.
 Government Loans.
 Short-term investments.

15. Capital Account Transaction’s Classification
Portfolio
Investment .
 Stocks,
 Bonds,
 Bank
 Loans,
 Derivatives.
Direct
Investment.
 Real estate
 Production
facilities
 Equity
investment.
Other investment.
Holdings in
loans
 Bank accounts
Currencies

16. Capital Account Convertibility
Capital account convertibility (CAC) refers to the freedom of
converting local financial assets into foreign financial assets and
vice versa at market determined rates of exchange. It refers to
the elimination of restraints on international flows on a country’s
capital account, facilitating full currency convertibility and
opening of the financial system.

17. Currently Restrictions : Capital Account
 Limits to companies borrowing abroad.
 Restriction on foreigner investing in India.
 Restriction on amount that FII can hold.
 Purchasing a company is allowed but limit exit on the
amount that can be send.
 Global Diversification of household portfolio is practically
non-existent.

18. RUPEE CONVERTIBILITY

19. Introduction
• The Indian rupee(Devanagari: रुपया)) is
the official currency of “The republic
of India”.
• Today, the currency is available in the
form of “Bank notes” and “coins of
the rupee”.

20. Convertibility of Rupee
Convertibility of a currency implies that a currency can be
transferred into another currency without any limitations or any
control.
A currency is said to be fully convertible, if it can be converted into
some other currency at the market price of that currency.
Convertibility can be related as the extent to which a country's
regulations allow free flow of money into and outside the country.
Convertibility of rupees is known as freedom of exchange of rupee
with other all international currency

21. History of Rupee Convertibility
 Upto 1991, there was rigid control on both Capital and Current
account.
 After start of liberalization in1991, India had accepted the IMF
rules for currency reforms.
 Capital account convertibility was introduced in India in August
1994.
 In 1997 the government had set up a committee (Tarapore
committee) to spell out a road map for the full convertibility of
the rupee.

23. Current Account Convertibility
 Indian scenario - fully convertible.
 Full freedom to both residents and non-residents.
 RBI has placed a cap in creation of a capital asset
 Freedom in respect of payments and transfers for current
international transactions.

24. Benefits of capital account convertibility
to India:
The Tarapore Committee mentioned the following benefits of capital account
convertibility to India:
1. Availability of large funds to supplement domestic resources and thereby
promote economic growth.
2. Improved access to international financial markets and reduction in cost of
capital.
3. Incentive for Indians to acquire and hold international securities and assets, and
4. Improvement of the financial system in the context of global competition.
5. Freedom to convert local financial assets into foreign ones at market-
determined exchange rates
6. Leads to free exchange of currency at lower rates and an unrestricted mobility
of capital

25. Tarapore Committee
Reasons for the introduction of Capital Account Convertability in India:
It was meant to ensure total financial mobility in the country
It also aimed in the efficient appropriation or distribution of international capital
in India
Pre - conditions:
The fiscal deficit needs to be reduced to 3.5% of the GDP
Inflation rates need to be controlled between 3-5%
Non-performing assets (NPAs) need to be brought down to 5%
Cash Reserve Ratio (CRR) needs to be reduced to 3%
A monetary exchange rate band of plus minus 5% should be instituted

26. Tarapore Committee
 Committee on capital account credibility, set up by
RBI(Reserve Bank of India) under the chairmanship of
former RBI deputy governor S.S. Tarapore.
 Economists Surjit S Bhalla, M G Bhide, R H Patil, A V
Rajwade and Ajit Ranade were the members of the
Committee.

27. The Tarapore Committee on Capital
Account Convertibility
 Reserve Bank of India appointed the second Tarapore committee to set out the
framework for fuller Capital Account Convertibility.
 The committee was established to revisit the subject of fuller capital account
convertibility in the context of the progress in economic reforms, the stability of
the external and financial sectors, accelerated growth and global integration.
 The report of this committee was made public by RBI on 1st September 2006. In
this report, the committee suggested 3 phases of adopting the full convertibility
of rupee in capital account.
 First Phase in 2006-7
 Second phase in 2007-09
 Third Phase by 2011.

28. Recommendations
Following were some important recommendations of this committee:
 The ceiling for External Commercial Borrowings (ECB) should be raised for
automatic approval.
 NRI should be allowed to invest in capital markets and NRI deposits should be given
tax benefits.
 Improvement of the Banking regulation.
 FII (Foreign Institutional Investors) should be prohibited from investing fresh money
raised to participatory notes.
 Existing PN holders should be given an exit route to phase out completely the PN
notes.
At present the rupee is fully convertible on the current account, but only partially
convertible on the capital account.

29. MACROECONOMIC AND FINANCIAL
INDICATORS
Various macro economic indicators of India
Source : RBI