Capital Account Convertibility (CAC) could result in more entrenched public-private partnership in India. There could be a competitive exchange rate policy and boost to trade sectors. All these factors are favorable for growth in Indian banking system. CAC differs in degree from country to country; while external funds are important for economic growth, there are issues like liquidity, exchange rate and interest rates associated with CAC. What is vital is the effective utilization of these funds with the right strategies.

It is true that since 1990 the International Monetary Fund (IMF) has been insisting on capital account convertibility for all countries seeking help to revive their economies. It is also an established fact that such insistence often proved to be fatal as most of the countries were found totally unprepared to adopt such policy. It was more visible when Asian meltdown happened sometime in 1997. It has an adverse impact in many situations. The IMF, on its part, has even tried to empower itself to supervise and control the convertibility levels of various economies. Its argument is that such supervisory overview will create the right environment for flow of capital across countries and continents seamlessly. IMF argues that such resistance is conducive for economic growth. However, such empowerment has not happened and perhaps for right reason.However, the agenda for capital account liberalization globally remained high on the list of developed countries, particularly the US, to enable them to enlarge their space for trade and commerce by participating in the economic development of developing countries with their reserve funds, technology and management skill.

In fact, the US started insisting on free flow of funds even when negotiating bilateral trade agreements with developing countries. Such participations have also created evidences that increased flow of foreign capital has helped countries to achieve high rate of economic growth because such free flow has enabled these countries not only fund infrastructure and institutional development at low cost but also enabled them to avail themselves of the benefit of appropriate advanced technology and managerial expertise of the developed countries. In this regard, Brazil, Russia, India, China (BRIC) countries perhaps provide best examples.

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