The buzzword, `Capital Account Convertibility has stimulated intellectual thinking once again. The pros and cons are being discussed extensively and the fundamental question that all are attempting to answer is whether India is ready for the challenge of making its capital account fully convertible. There are two schools of thought which are distinct in their approach and thinking. One group strongly feels that India can certainly make its capital account fully convertible given the premise of increasing foreign exchange reserves, while the other group has strong pessimistic feelings in this regard.

The Prime Minister Manmohan Singh on March 18, 2006 stated that the time had arrived for India to take on certain grueling issues and accordingly he assigned the task of drawing out a roadmap on Capital Account Convertibility (CAC) to the RBI taking into consideration the prevailing ground realities. In response to the Prime Minister's statement, the Reserve Bank of India on March 20, 2006, announced a committee headed by SS Tarapore to chalk out a roadmap towards full capital account convertibility. The committee was asked to commence its work from May 1, 2006 and submit its report by July 31, 2006.

Let us first define capital account convertibility. The most comprehensive definition that has been provided by the first Tarapore Committee (February 1997) is as follows"Capital Account Convertibility (CAC) refers to the freedom to convert local financial assets into foreign financial assets and vice 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 thereon, or by, the rest of the world."

At this juncture we need to look at the status of convertibility in India. India presently has a system of current account convertibility in place. This means that Indian residents and corporates can make and receive payments for import/export of goods and services. They will also be able to access foreign currency for travel, education, medical or other designated purposes for which the current limit is $25,000.

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