} 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:
- } Maintenance of domestic economic stability.
- } Adequate foreign exchange reserves.
- } Restrictions on inessential imports as long as the foreign exchange position is not very comfortable.
- } Comfortable current account position.
- } An appropriate industrial policy and a conducive investment climate.
- An outward oriented development strategy and sufficient incentives for export growth.
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